Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying consolidated financial statements, the notes thereto, and the other financial information appearing elsewhere in this report. The following discussion includes forward-looking statements that involve certain risks and uncertainties. See "Cautionary Statement Regarding Forward-Looking Statements" and "Item 1A. Risk Factors" in this report.
We are a Delaware limited partnership formed by Westlake to operate, acquire and develop ethylene production facilities and related assets. On August 4, 2014, we closed our initial public offering (the "IPO") of 12,937,500 common units. In connection with the IPO, we acquired a 10.6% interest in OpCo and a 100% interest in OpCo GP, which is the general partner of OpCo. On April 29, 2015, we purchased an additional 2.7% newly-issued limited partner interest in OpCo, resulting in an aggregate 13.3% limited partner interest in OpCo effective April 1, 2015. On September 29, 2017, we completed a secondary public offering of 5,175,000 common units and purchased an additional 5.0% newly-issued limited partner interest in OpCo, resulting in an aggregate 18.3% limited partner interest in OpCo, effective as of July 1, 2017. The 12,686,115 subordinated units of the Partnership, all of which were previously owned by Westlake, were converted into common units of the Partnership on August 30, 2017.
Currently, our sole revenue generating asset is our 18.3% limited partner interest in OpCo, a limited partnership formed by Westlake and us in anticipation of the IPO to own and operate an ethylene production business. We control OpCo through our ownership of its general partner. Westlake retains the remaining 81.7% limited partner interest in OpCo as well as a significant interest in us through its ownership of our general partner, 43.8% of our limited partner units (consisting of 14,122,230 common units ) and our incentive distribution rights. OpCo's assets include (1) two ethylene production facilities ("Petro 1" and "Petro 2" and, collectively, "Lake Charles Olefins") at Westlake's Lake Charles, Louisiana site; (2) one ethylene production facility ("Calvert City Olefins") at Westlake's Calvert City, Kentucky site; and (3) a 200-mile common carrier ethylene pipeline (the "Longview Pipeline") that runs from Mont Belvieu, Texas to Westlake's Longview, Texas facility.
How We Generate Revenue
We generate revenue primarily by selling ethylene and the resulting co-products we produce. OpCo and Westlake have entered into an ethylene sales agreement (the "Ethylene Sales Agreement") pursuant to which we generate a substantial majority of our revenue. The Ethylene Sales Agreement is a long-term, fee-based agreement with a minimum purchase commitment and includes variable pricing based on OpCo's actual feedstock and natural gas costs and estimated other costs of producing ethylene (including OpCo's estimated operating costs and a five-year average of OpCo's expected future maintenance capital expenditures and other turnaround expenditures based on OpCo's planned ethylene production capacity for the year), plus a fixed margin per pound of $0.10 less revenue from co-products sales. Pursuant to the Ethylene Sales Agreement, Westlake's obligation to pay for the annual minimum commitment (95% of OpCo's budgeted ethylene production), which is measured at the end of the year, is generally not reduced for the first 45 days of a force majeure event, but is reduced for the portion of a force majeure event extending beyond the 45th day.
Westlake has an option to take 95% of volumes in excess of the minimum commitment on an annual basis under the Ethylene Sales Agreement if we produce more than our planned production. Under the Ethylene Sales Agreement, the price for the sale of such excess ethylene to Westlake is based on a formula similar to that used for the minimum purchase commitment, with the exception of certain fixed costs. In addition, under the Ethylene Sales Agreement, if production costs billed to Westlake on an annual basis are less than 95% of the actual production costs incurred by OpCo during the contract year, OpCo is entitled to recover the shortfall in such production costs (proportionate to the volume sold to Westlake) in the subsequent year ("Shortfall"). The Shortfall is recognized during the period in which the related operating, maintenance or turnaround activities occur.
We sell ethylene production in excess of volumes sold to Westlake, as well as all associated co-products resulting from the ethylene production, directly to third parties on either a spot or contract basis. Net proceeds (after transportation and other costs) from the sales of associated co-products that result from the production of ethylene purchased by Westlake are netted against the ethylene price charged to Westlake under the Ethylene Sales Agreement, thereby substantially reducing our exposure to fluctuations in the market prices of these co-products. During 2018, all the third-party ethylene and associated co-products sales generated
16.4%
of our total revenues.
Under the Services and Secondment Agreement, OpCo uses a portion of its production capacity to process purge gas for Westlake. On August 4, 2016, OpCo and Westlake entered into an amendment to the Ethylene Sales Agreement in order to provide that certain of the pricing components that make up the price for ethylene sold thereunder would be modified to reflect the portion of OpCo's production capacity that is used to process Westlake's purge gas instead of producing ethylene and to clarify that costs specific to the processing of Westlake's purge gas would be recovered under the Services and Secondment Agreement, and not the Ethylene Sales Agreement.
Please refer to Note
2
to the consolidated financial statements included within this report for more information on the Ethylene Sales Agreement.
How We Source Feedstock
OpCo has entered into a 12-year feedstock supply agreement (the "Feedstock Supply Agreement") with Westlake Petrochemicals LLC, a wholly owned subsidiary of Westlake, under which Westlake Petrochemicals LLC supplies OpCo with ethane and other feedstocks that OpCo uses to produce ethylene under the Ethylene Sales Agreement. OpCo may purchase the ethane and other feedstocks to produce ethylene and resulting co-products to sell to unrelated third parties from Westlake Petrochemicals LLC.
Please refer to Note
2
to the consolidated financial statements included within this report for more information on the Feedstock Supply Agreement.
How We Evaluate Operations
Our management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include: (1) production volumes, (2) operating and maintenance expenses, including turnaround costs, and (3) MLP distributable cash flow and EBITDA.
Production Volumes
The amount of profit we generate primarily depends on the volumes of ethylene and resulting co-products we are able to produce at Calvert City Olefins and Lake Charles Olefins. Although Westlake has committed to purchasing minimum volumes from us under the Ethylene Sales Agreement, our results of operations are impacted by our ability to:
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produce sufficient volumes of ethylene to meet our commitments under the Ethylene Sales Agreement or recover our estimated costs through the pricing provisions of the Ethylene Sales Agreement;
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•
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contract with third parties for the remaining uncommitted production capacity;
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•
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add or increase capacity at our existing production facilities, or add additional production capacity via organic expansion projects and acquisitions; and
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achieve or exceed the specified yield factors for natural gas, ethane and other feedstock under the Ethylene Sales Agreement.
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Operating Expenses, Maintenance Capital Expenditures and Turnaround Costs
Our management seeks to maximize the profitability of our operations by effectively managing operating expenses, maintenance capital expenditures and turnaround costs. Our operating expenses are comprised primarily of feedstock costs and natural gas, labor expenses (including contractor services), utility costs (other than natural gas) and turnaround and maintenance expenses. With the exception of feedstock, including natural gas, and utilities-related expenses, operating expenses generally remain relatively stable across broad ranges of production volumes but can fluctuate from period to period depending on the circumstances, particularly maintenance and turnaround activities. Our maintenance capital expenditures and turnaround costs are comprised primarily of maintenance of our ethylene production facilities and the amortization of capitalized turnaround costs. These capital expenditures relate to the maintenance and integrity of our facilities. We capitalize the costs of major maintenance activities, or turnarounds, and amortize the costs over the period until the next planned turnaround of the affected facility.
Operating expenses, maintenance capital expenditures and turnaround costs are built into the price per pound of ethylene charged to Westlake under the Ethylene Sales Agreement. Because the expenses other than feedstock costs and natural gas are based on forecasted amounts and remain a fixed component of the price per pound of ethylene sold under the Ethylene Sales Agreement for any given 12-month period, our ability to manage operating expenses, maintenance expenditures and turnaround cost may directly affect our profitability and cash flows. The impact on profitability is partially mitigated by the fact that we recognize any Shortfall as revenue in the period such costs and expenses are incurred. We seek to manage our operating and maintenance expenses on our ethylene production facilities by scheduling maintenance and turnarounds over time to avoid significant variability in our operating margins and minimize the impact on our cash flows, without compromising our commitment to safety and environmental stewardship. In addition, we reserve cash on an annual basis from what we would otherwise distribute to minimize the impact of turnaround costs in the year of incurrence. The purchase price under the Ethylene Sales Agreement is not designed to cover capital expenditures for expansions.
MLP Distributable Cash Flow and EBITDA
We use each of MLP distributable cash flow and EBITDA to analyze our performance. We define distributable cash flow as net income plus depreciation, amortization and disposition of property, plant and equipment, less contributions for turnaround reserves, maintenance capital expenditures and mark-to-market adjustment loss on derivative contracts. We define MLP distributable cash flow as distributable cash flow less distributable cash flow attributable to Westlake's noncontrolling interest in OpCo and distributions attributable to the incentive distribution rights holder. MLP distributable cash flow does not reflect changes in working capital balances. We define EBITDA as net income before interest expense, income taxes, depreciation and amortization. MLP distributable cash flow and EBITDA are non-GAAP supplemental financial measures that management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:
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our operating performance as compared to other publicly traded partnerships;
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our ability to incur and service debt and fund capital expenditures; and
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the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
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We believe that the presentation of MLP distributable cash flow and EBITDA provides useful information to investors in assessing our financial condition and results of operations. MLP distributable cash flow should not be considered as an alternative to GAAP measures. MLP distributable cash flow has important limitations as an analytical tool because it excludes some but not all items that affect net income and net cash provided by operating activities. EBITDA should not be considered
an alternative to such GAAP measures. EBITDA has important limitations as an analytical tool because it excludes (1) interest expense, which is a necessary element of our costs and ability to generate revenues because we have borrowed money to finance our operations, (2) depreciation, which is a necessary element of our costs and ability to generate revenues because we use capital assets and (3) income taxes, which was a necessary element of the operations of our predecessor. MLP distributable cash flow and EBITDA should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. See reconciliations for each of MLP distributable cash flow and EBITDA under Item 6 "Selected Financial Data" above.
Factors Affecting Our Business
Supply and Demand for Ethylene and Resulting Co-products
We generate a substantial majority of our revenue from the Ethylene Sales Agreement. This contract is intended to promote cash flow stability and minimize our direct exposure to commodity price fluctuations in the following ways: (1) the cost-plus pricing structure of the Ethylene Sales Agreement is expected to generate a fixed margin of $0.10 per pound, adjusting automatically for changes in feedstock costs; and (2) Westlake is committed to purchase 95% of the annual planned output, subject to a maximum commitment of 3.8 billion pounds of ethylene per year, with an option to purchase an additional 95% of actual output in excess of the planned output on a contract year basis. As a result, our direct exposure to commodity price risk is limited to approximately 5% of our total ethylene production, which is that portion sold to third parties, assuming Westlake exercises its option to purchase 95% of the over production, as well as to our co-products sales.
We also have indirect exposure to commodity price fluctuations to the extent such fluctuations affect the ethylene consumption patterns of third-party purchasers. Demand for ethylene exhibits cyclical commodity characteristics as margins earned on ethylene derivative products are influenced by changes in the balance between supply and demand, the resulting operating rates and general economic activity. While we believe we have substantially mitigated our indirect exposure to commodity price fluctuations during the term of the Ethylene Sales Agreement through the minimum commitment and the cost-plus based pricing, our ability to execute our growth strategy in our areas of operation will depend, in part, on the demand for ethylene derivatives in the geographical areas served by our ethylene production facilities.
Recent Developments
On November 1, 2018, OpCo and Westlake entered into an amendment to the Ethylene Sales Agreement in order to provide OpCo with the option to curtail up to approximately 5% of its ethylene production annually in the event OpCo reasonably determines that its sales of such ethylene to third parties during the relevant period would be uneconomic.
On October 4, 2018, the Partnership and Westlake Chemical Partners GP LLC, the general partner of the Partnership, entered into an Equity Distribution Agreement (the "ATM Agreement") with UBS Securities LLC, Barclays Capital Inc., Citigroup Global Markets Inc., Deutsche Bank Securities Inc., RBC Capital Markets, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC (collectively, the "Managers"). Pursuant to the terms of the ATM Agreement, the Partnership may offer and sell common units representing limited partner interests in the Partnership from time to time to or through the Managers, as the Partnership's sales agents or as principals, having an aggregate offering amount of up to $50.0 million. The Partnership intends to use the net proceeds of sales of the common units for general partnership purposes, including the funding of potential drop-downs and other acquisitions.
On September 25, 2018, the OpCo Revolver was amended to extend the maturity date from August 4, 2019 to September 25, 2023 and to revise the applicable margin from 3% to 2%. See Note 8 "Long-Term Debt" to the consolidated financial statements included within this report.
On July 27, 2018, the Partnership's partnership agreement was amended to revise the minimum quarterly distribution thresholds for the Partnership's incentive distribution rights to Westlake. The amended partnership agreement provides that the Partnership will distribute cash each quarter to all the unitholders, pro-rata, until each common unit has received a distribution of
$1.2938
. If cash distributions to the Partnership's unitholders exceed
$1.2938
per common unit in any quarter, the Partnership's unitholders and Westlake, as the holder of the Partnership's incentive distribution rights, will receive distributions according to the percentage allocations per the amendment. For more information on the Partnership's amended distribution allocation percentages, see Note
9
"Distributions and Net Income Per Limited Partner Unit" to the consolidated financial statements included within this report.
Results of Operations
The table below and descriptions that follow represent the consolidated results of operations of the Partnership for the years
2018
,
2017
and
2016
.
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Year Ended December 31,
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2018
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2017
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2016
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(in thousands of dollars, except unit amounts and per unit data)
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Net sales—Westlake
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$
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1,074,957
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$
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973,081
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$
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853,719
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Net co-products, ethylene and feedstock sales—third parties
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210,665
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199,900
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133,017
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Total net sales
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1,285,622
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1,172,981
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986,736
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Gross profit
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377,159
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403,667
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391,331
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Selling, general and administrative expenses
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27,590
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29,260
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24,887
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Income from operations
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349,569
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374,407
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366,444
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Other income (expense)
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Interest expense—Westlake
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(21,433
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)
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(21,861
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)
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(12,607
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)
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Other income, net
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2,457
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1,792
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601
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Income before income taxes
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330,593
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354,338
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354,438
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Provision for income taxes
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22
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1,280
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1,035
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Net income
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$
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330,571
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$
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353,058
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$
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353,403
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Less: Net income attributable to noncontrolling interest in OpCo
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281,224
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304,388
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312,463
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Net income attributable to Westlake Chemical
Partners LP s and limited partners' interest in net income
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$
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49,347
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$
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48,670
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$
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40,940
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Net income attributable to Westlake Chemical Partners LP
per limited partner unit (basic and diluted)
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Common units
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$
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1.51
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$
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1.72
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$
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1.50
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Subordinated units
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$
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—
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$
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1.43
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$
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1.50
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Weighted average limited partner units outstanding
(basic and diluted)
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Common units—public
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18,118,628
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14,270,240
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12,937,500
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Common units—Westlake
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14,122,230
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7,831,307
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1,436,115
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Subordinated units—Westlake
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—
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6,290,923
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12,686,115
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MLP distributable cash flow
(1)
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$
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60,024
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$
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54,700
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$
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32,405
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EBITDA
(1)
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$
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460,868
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$
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490,184
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$
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465,255
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Year Ended December 31,
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2018
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2017
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Average Sales
Price
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Volume
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Average Sales
Price
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Volume
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Product sales price and volume percentage change
from prior year
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+6.0
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%
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+3.6
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%
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-1.6
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%
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+20.5
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%
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Year Ended December 31,
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2018
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2017
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2016
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Average industry prices
(2)
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Ethane (cents/lb)
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11.0
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8.3
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6.6
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Propane (cents/lb)
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20.8
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18.1
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11.4
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Ethylene (cents/lb)
(3)
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19.0
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28.0
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26.9
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______________________________
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(1)
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See Item 6, Selected Financial Data, for discussions on non-GAAP financial measures.
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(2)
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Industry pricing data was obtained through IHS. We have not independently verified the data.
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(3)
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Represents average North American spot prices of ethylene over the period as reported by IHS.
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Summary
For the year ended
December 31, 2018
, net income was
$330.6 million
on net sales of
$1,285.6 million
. This represents
a decrease
in net income of
$22.5 million
compared to
2017
net income of
$353.1 million
on net sales of
$1,173.0 million
. Net income in
2018
was lower due to lower margins on third party ethylene sales resulting from lower ethylene sales prices and higher feedstock costs. This decrease was partially offset by higher ethylene sales volumes to Westlake, higher pipeline services fee income and lower state income tax expense as compared to
2017
. Net income attributable to the Partnership in
2018
was
$49.3 million
as compared to
$48.7 million
in
2017
,
an increase
of
$0.6 million
, which was primarily due to a 5% increase in the Partnership's interest in OpCo, effective as of July 1, 2017 and increased production at OpCo's facilities, partially offset by lower margins on third party sales volumes. Net sales for
2018
increased
by
$112.6 million
as compared to
2017
mainly due to higher sales volumes to Westlake and third parties, higher ethylene sales prices to Westlake and higher pipeline services fee income, partially offset by lower third party ethylene sales prices. Income from operations was
$349.6 million
for
2018
as compared to
$374.4 million
for
2017
. Income from operations
decreased
mainly as a result of lower third party ethylene sales margins, partially offset by higher ethylene sales to Westlake and higher pipeline services fee income, as compared to
2017
.
2018
Compared with
2017
Net Sales
. Net sales
increased
by
$112.6 million
, or
9.6%
, to
$1,285.6 million
in
2018
from
$1,173.0 million
in
2017
, primarily due to higher sales volumes to Westlake and third parties, higher ethylene sales prices to Westlake and higher pipeline services fee income, partially offset by lower third party ethylene sales prices. The overall increase in sales volumes for
2018
contributed to a
3.6%
increase in net sales, as compared to
2017
, which was mainly due to higher sales volumes to Westlake and third parties and higher pipeline services fees income.
The average sales price contributed to an increase in net sales by
6.0%
in 2018 compared to 2017, primarily as a result of higher sales prices to Westlake per the terms of the Ethylene Sales Agreement, partially offset by lower third party ethylene sales prices.
Gross Profit
. Gross profit
decreased
to
$377.2 million
in
2018
from
$403.7 million
in
2017
. The gross profit margin was
29.3%
in
2018
as compared to
34.4%
in
2017
. The 2018 gross profit margin was lower mainly due to lower third party ethylene sales prices and higher feedstock costs, partially offset by overall higher sales volumes to Westlake and third parties as a result of higher overall production at OpCo's facilities and higher pipeline services fee income, as compared to
2017
.
Selling, General and Administrative Expenses
. Selling, general and administrative expenses
decreased
by
$1.7 million
, or
5.8%
, to
$27.6 million
in
2018
from
$29.3 million
in
2017
. The
decrease
was mainly attributable to lower service costs, partially offset by an increase in professional consulting fees in
2018
, as compared to
2017
.
Interest Expense
. Interest expense
decreased
by
$0.5 million
to
$21.4 million
in
2018
from
$21.9 million
in
2017
, largely due to a lower average debt balance in
2018
, mostly offset by a higher interest rate on debt due to an increase in the London Interbank Offered Rate ("LIBOR") in
2018
. The lower debt balance was due to the partial repayment of borrowings under the OpCo Revolver and full repayment of the August 2013 Promissory Notes during the third quarter of 2017.
Other Income.
The
increase
in other income in
2018
as compared to
2017
was primarily due to the interest income related to the investment management agreement entered into in August 2017 between the Partnership, OpCo and Westlake that authorized Westlake to invest the Partnership's and OpCo’s excess cash with Westlake ("Investment Management Agreement").
Provision for Income Taxes.
Provision for income taxes
decreased
to
$0.02 million
in
2018
as compared to
$1.3 million
in
2017
. The
decrease
was mainly attributable to the revaluation of state deferred income tax liability as a result of a decrease in state tax apportionment.
MLP Distributable Cash Flow.
MLP distributable cash flow
increased
by
$5.3 million
to
$60.0 million
in
2018
from
$54.7 million
in
2017
. The increase in MLP distributable cash flow as compared to
2017
was primarily due to the 5% increase in the Partnership's interest in OpCo, effective as of July 1, 2017, an increase in overall production at OpCo's facilities, lower maintenance capital expenditures and the elimination of the Partnership's distributions to Westlake as the holder of the Partnership's incentive distribution rights per the July 2018 amendment to the Partnership's target distribution tiers, partially offset by lower margins on third party sales.
EBITDA.
EBITDA
decreased
by
$29.3 million
to
$460.9 million
in
2018
from
$490.2 million
in
2017
. The decrease in EBITDA, as compared to
2017
, was primarily due to lower third party ethylene sales prices, partially offset by higher sales volumes as a result of higher overall production at OpCo's facilities.
2017
Compared with
2016
Net Sales
. Net sales increased by $186.3 million, or 18.9%, to $1,173.0 million in 2017 from $986.7 million in 2016, primarily due to higher sales volumes to Westlake and third parties, partially offset by the Shortfall of approximately $63.5 million recognized during 2016. The overall sales volumes in 2017 contributed to an increase in net sales of 20.5%, as compared to 2016, due to higher sales volumes to Westlake and third parties. Ethylene production at the Lake Charles Petro I facility increased in 2017 as a result of the upgrade and capacity expansion that was completed in July 2016 and higher production rates at the Lake Charles Petro 2 and Calvert City Olefins facilities, as compared to 2016. The overall ethylene and co-product sales price in 2017 decreased by 1.6%, which was primarily due to lower ethylene sales prices to Westlake in 2017, as compared to 2016, partially offset by the increase in sales prices of ethylene and co-products to third parties in 2017, as compared to 2016.
Gross Profit
. Gross profit margin percentage was 34.4% in 2017 as compared to 39.7% in 2016. The lower gross profit margin was primarily due to the higher depreciation and amortization expense in 2017 as a result of the 2016 Lake Charles Petro 1 facility upgrade and expansion and the recognition of the Shortfall in 2016, partially offset by higher sales volume to third parties and Westlake, as compared to 2016. Gross profit increased to $403.7 million in 2017 from $391.3 million in 2016, primarily because of higher sales volume in 2017.
Selling, General and Administrative Expenses
. Selling, general and administrative expenses increased by $4.4 million, or 17.7%, to $29.3 million in 2017 from $24.9 million in 2016. The increase was mainly attributable to an increase in consulting and professional fees and services costs, partially offset by a decrease in the allowance for bad debt accounts in 2017, as compared to 2016.
Interest Expense
. Interest expense increased by $9.3 million to $21.9 million in 2017 from $12.6 million in 2016, largely due to decreased capitalized interest on major projects in 2017, as compared to 2016, and a higher average debt balance in 2017 to fund the capital expenditures related to the Lake Charles Petro 1 upgrade and expansion in 2016 and the Calvert City Olefins upgrade and expansion.
MLP Distributable Cash Flow
. MLP distributable cash flow increased by $22.3 million to $54.7 million in 2017 from $32.4 million in 2016. The increase in MLP distributable cash flow as compared to prior year was due to the Partnership’s increased ownership interest in OpCo and higher production volume in 2016.
EBITDA
. EBITDA increased by $24.9 million to $490.2 million in 2017 from $465.3 million in 2016. The increase in EBITDA as compared to the prior year was due to increased production at all of OpCo’s facilities following the completion of expansion projects at the Lake Charles Petro 1 and Calvert City Olefins facilities, partially offset by the Shortfall of approximately $63.5 million recognized in 2016.
Cash Flows
Operating Activities
Operating activities provided cash of
$436.2 million
in
2018
compared to cash provided of
$537.4 million
in
2017
. The
$101.2 million
decrease
in cash flows from operating activities was mainly due to lower operating income and an increase in use of cash in working capital during
2018
as compared to
2017
. Changes in components of working capital, which we define for the purposes of this cash flow discussion as accounts receivable—Westlake, accounts receivable, net—third parties, inventories, prepaid expenses and other current assets less accounts payable—Westlake, accounts payable—third parties and accrued liabilities,
used
cash of
$4.3 million
in
2018
as compared to
$78.3 million
of cash
provided
in
2017
, resulting in an overall
unfavorable
change of
$82.6 million
. This change was primarily due to the
unfavorable
change in the Westlake accounts receivable balance in 2018 as compared to 2017. The unfavorable change was primarily due to the recovery of the Shortfall and a buyer deficiency fee in 2017 that were recognized in 2016 as accounts receivable from Westlake.
Operating activities provided cash of $537.4 million in 2017 compared to cash provided of $287.7 million in 2016. The $249.8 million increase in cash flows from operating activities was mainly due to an increase in cash provided by working capital and lower turnaround related expenditures during 2017 as compared to 2016. Changes in components of working capital, which we define for the purposes of this cash flow discussion as accounts receivable—Westlake, accounts receivable, net—third parties, inventories, prepaid expenses and other current assets less accounts payable—Westlake, accounts payable—third parties and accrued liabilities, provided cash of $78.3 million in 2017 as compared to $89.8 million of cash used in 2016, resulting in an overall favorable change of $168.1 million. This change was primarily due to a favorable change in the Westlake accounts receivable balance due to the collection of the 2016 Shortfall amount and a buyer deficiency fee in 2017, partially offset by unfavorable changes in third party accounts receivable and accrued liabilities.
Investing Activities
Net cash used for investing activities during
2018
was
$51.8 million
as compared to net cash used for investing activities of
$203.2 million
in
2017
, mainly due to lower net cash invested with Westlake under the Investment Management Agreement and lower capital expenditures in 2018, as compared to 2017. During 2018, we invested
$384.0 million
with Westlake and maturities of such investments were
$372.1 million
. Capital expenditures were
$39.9 million
in
2018
compared to
$68.9 million
in
2017
. Capital expenditures during
2018
were primarily related to planned and unplanned outages at our facilities while those in
2017
primarily reflected capital expenditures incurred for the Calvert City expansion project.
Net cash used for investing activities during 2017 was $203.2 million as compared to net cash used for investing activities of $299.5 million in 2016, mainly due to $136.2 million of net cash invested with Westlake under the Investment Management Agreement, partially offset by decreased capital expenditures during 2017 as compared to 2016. Capital expenditures were $68.9 million in 2017 compared to $299.6 million in 2016. Capital expenditures during 2017 were primarily incurred for the Calvert City expansion while 2016 primarily reflected capital expenditures for the Lake Charles Petro 1 facility upgrade and expansion project.
Financing Activities
Net cash used for financing activities during
2018
was
$391.6 million
as compared to net cash used for financing activities of
$396.0 million
in 2017. The cash outflows during 2018 were related to the distribution of
$341.9 million
to Westlake and of
$53.4 million
to other unitholders by the Partnership. The distributions in 2018 were partially offset by borrowings under the OpCo Revolver of
$3.6 million
.
Net cash used for financing activities during 2017 was $396.0 million as compared to net cash used for financing activities of $68.9 million during 2016. The cash outflows during 2017 were related to the distribution of $343.9 million to Westlake and of $42.1 million to other unitholders by the Partnership and the partial repayment of $254.2 million of borrowings under the OpCo Revolver and the full repayment of the August 2013 Promissory Notes of $31.7 million as compared to the distribution of $244.6 million to Westlake and of $34.9 million to other unitholders during 2016. The cash inflows during 2017 were related to borrowings under the OpCo Revolver of $47.1 million to fund capital expenditures, the borrowings of $118.2 million under the MLP Revolver and net proceeds from the common units offering of $110.7 million, as compared to borrowings under the OpCo Revolver of $212.2 million in 2016 primarily to fund capital expenditures and our working capital requirements.
Liquidity and Capital Resources
Liquidity and Financing Arrangements
Pursuant to the terms of the ATM Agreement, the Partnership may offer and sell the Partnership's common units from time to time to or through the Managers, as the Partnership's sales agents or as principals, having an aggregate offering amount of up to $50.0 million. The Partnership intends to use the net proceeds of sales of the common units, if any, for general partnership purposes, including the funding of potential drop-downs and other acquisitions.
Based on the terms of our cash distribution policy, we expect that we will distribute to our partners most of the excess cash generated by our operations. To the extent we do not generate sufficient cash flow to fund capital expenditures, we expect to fund them primarily from external sources, including borrowing directly from Westlake, as well as future issuances of equity and debt interests.
The Partnership maintains separate bank accounts, but Westlake continues to provide treasury services on our behalf under the Services and Secondment Agreement. Our sources of liquidity include cash generated from operations, the OpCo Revolver, the MLP Revolver and, if necessary and possible under then current market conditions, the issuance of additional equity interests or debt. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements and long-term capital expenditure requirements and to make quarterly cash distributions. Westlake may also provide other direct and indirect financing to us from time to time, although it is not required to do so.
In order to fund non-annual turnaround expenditures, we cause OpCo to reserve approximately $30.0 million during each twelve-month period for turnaround activities. Each of OpCo's ethylene production facilities requires turnaround maintenance approximately every five years. By reserving additional cash annually, we intend to reduce the variability in OpCo's cash flow. Westlake's purchase price for ethylene purchased under the Ethylene Sales Agreement includes a component (adjusted annually) designed to cover, over the long term, substantially all of OpCo's turnaround expenditures.
Our cash is generated from cash distributions from OpCo. OpCo is a restricted subsidiary under certain indentures governing Westlake's senior notes. The indentures governing Westlake's senior notes prevent OpCo from making distributions to us if any default or event of default (as defined in the indentures) exists. Westlake's credit facility does not prevent OpCo from making distributions to us.
On September 29, 2017, we completed our secondary offering of 5,175,000 common units at a price of $22.00 per unit. Net proceeds to the Partnership from the sale of the units were $110.7 million, net of underwriting discounts, structuring fees and estimated offering expenses of approximately $3.1 million.
On August 1, 2017, the Partnership entered into an Investment Management Agreement with OpCo and Westlake that authorizes Westlake to invest the Partnership's and OpCo’s excess cash with Westlake for a term of up to a maximum of nine months. Per the terms of the Investment Management Agreement, cash invested with Westlake earns a market return plus five basis points and Westlake provides daily availability of the invested cash to meet any liquidity needs of the Partnership or OpCo.
On
January 25, 2019
, the board of directors of Westlake Chemical Partners GP LLC, our general partner, approved a quarterly distribution of
$0.4328
per unit payable on
February 20, 2019
to unitholders of record on
February 5, 2019
, which equates to approximately
$14.0 million
per quarter, or approximately
$55.8 million
per year in aggregate, based on the number of common units outstanding on December 31,
2018
. We do not have a legal or contractual obligation to pay distributions on a quarterly basis or any other basis at our minimum quarterly distribution rate or any other rate.
Capital Expenditures
OpCo completed its expansion project to increase the ethylene capacity at its Calvert City facility in 2017 and Lake Charles Petro 1 facility upgrade and ethylene capacity expansion project in 2016.Westlake has historically funded expansion capital expenditures related to Lake Charles Olefins and Calvert City Olefins.
During the years ended December 31,
2018
and
2017
, Westlake loaned OpCo
$3.6 million
and
$165.3 million
, respectively. The
$3.6 million
was used to fund working capital needs in 2018, while $47.1 million of the
$165.3 million
amount was used to fund expansion capital expenditures in 2017. We expect that
Westlake will loan additional cash to OpCo to fund its expansion capital expenditures in the future, but Westlake is under no obligation to do so.
Cash and Cash Equivalents
As of
December 31, 2018
, our cash and cash equivalents totaled
$19.7 million
. In addition, we have cash invested under the Investment Management Agreement (as described below) and a revolving credit facility with Westlake available to supplement cash if needed, as described under "Indebtedness" below.
On August 1, 2017, the Partnership, OpCo and Westlake executed the Investment Management Agreement that authorized Westlake to invest the Partnership and OpCo’s excess cash with Westlake for a term of up to a maximum of nine months. Per the terms of the Investment Management Agreement, the Partnership earns a market return plus five basis points, and Westlake provides daily availability of the invested cash to meet any liquidity needs of the Partnership or OpCo. The Partnership had
$149.0 million
of cash invested under the Investment Management Agreement at
December 31, 2018
.
Indebtedness
OpCo Revolver
In connection with the IPO, OpCo entered into a $600.0 million revolving credit facility with Westlake ("OpCo Revolver") that may be used to fund growth projects and working capital needs. As of December 31,
2018
, outstanding borrowings under the OpCo Revolver totaled
$224.1 million
and bore interest at the LIBOR rate plus 2.0%, which is accrued in arrears quarterly. On September 25, 2018, the OpCo Revolver was amended to extend the scheduled maturity date from August 4, 2019 to September 25, 2023 and to revise the applicable margin from 3% to 2%.
MLP Revolver
In 2015, we entered into a senior, unsecured revolving credit agreement with Westlake Chemical Finance Corporation, an affiliate of Westlake ("MLP Revolver"). The MLP Revolver has a borrowing capacity of $600.0 million and is scheduled to mature in 2021. Borrowings under the MLP Revolver bear interest at LIBOR plus a spread ranging from 2.0% to 3.0% (depending on our consolidated leverage ratio), payable quarterly. The MLP Revolver provides that we may pay all or a portion of the interest on any borrowings in kind, in which case any such amounts would be added to the principal amount of the loan. The MLP Revolver requires that we maintain a consolidated leverage ratio of either (1) during any one-year period following certain types of acquisitions (including acquisitions of additional interests in OpCo), 5.50:1.00 or less, or (2) during any other period, 4.50:1.00 or less. The MLP Revolver also contains certain other customary covenants. The repayment of borrowings under the MLP Revolver is subject to acceleration upon the occurrence of an event of default. As of December 31,
2018
, the outstanding borrowings under the MLP Revolver totaled
$253.5 million
. We intend to use the MLP Revolver to purchase additional limited partnership interests in OpCo in the future, in the event OpCo desires to sell such additional interests to us, for other acquisitions and for general corporate purposes.
August 2013 Promissory Notes
In connection with the closing of the IPO, OpCo assumed $246.1 million of indebtedness under three intercompany promissory notes (the "August 2013 Promissory Notes"). The August 2013 Promissory Notes had a ten-year term and bore interest at the prime rate plus a 1.5% margin, which was accrued in arrears quarterly. OpCo had the right at any time to prepay the August 2013 Promissory Notes, in whole or in part, without any premium or penalty. The August 2013 Promissory Notes were scheduled to mature in August 2023. On September 29, 2017, OpCo repaid the balance of the August 2013 Promissory Note in full.
Contractual Obligations and Commercial Commitments
In addition to long-term debt, we are required to make payments relating to various types of obligations. The following table summarizes our contractual obligations as of
December 31, 2018
relating to long-term debt, interest payments, operating leases and purchase obligations for the next five years and thereafter. The amounts do not include deferred charges and other items classified in other liabilities in the consolidated balance sheet due to the uncertainty of the future payment schedule.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
Total
|
|
2019
|
|
2020-2021
|
|
2022-2023
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
Total Debt:
|
|
|
|
|
|
|
|
|
|
|
|
Principal
(1)
|
|
$
|
477.6
|
|
|
$
|
—
|
|
|
$
|
253.5
|
|
|
$
|
224.1
|
|
|
$
|
—
|
|
Interest
(2)
|
|
71.7
|
|
|
21.0
|
|
|
38.4
|
|
|
12.3
|
|
|
—
|
|
Operating leases
(3)
|
|
2.3
|
|
|
0.8
|
|
|
1.2
|
|
|
0.3
|
|
|
—
|
|
Purchase obligations
(4)
|
|
7.4
|
|
|
7.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
559.0
|
|
|
$
|
29.2
|
|
|
$
|
293.1
|
|
|
$
|
236.7
|
|
|
$
|
—
|
|
______________________________
|
|
(1)
|
Long-Term Debt
. Long-term debt consists of the revolving credit facilities.
|
|
|
(2)
|
Interest Payments.
Interest payments are based on interest rates in effect at
December 31, 2018
.
|
|
|
(3)
|
Operating Leases.
Represent noncancelable operating leases with respect to rail cars that are subleased to OpCo and two site lease agreements for various periods. Pursuant to the site lease agreements, OpCo leases the real property underlying Lake Charles Olefins and Calvert City Olefins. OpCo is also granted rights to access and use certain other portions of Westlake's production facilities that are necessary to operate OpCo's ethylene production facilities. OpCo owes Westlake one dollar per site per year. Each of the site lease agreements has a term of 50 years.
|
|
|
(4)
|
Purchase Obligations.
Purchase obligations include agreements to purchase goods and services that are enforceable and legally binding and that specify all significant terms, including a minimum quantity and price. We are party to various obligations to purchase goods and services, including the Services and Secondment Agreement, in the ordinary course of our business, as well as various purchase commitments for our capital projects.
|
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies
Critical accounting policies are those that are important to our financial condition and require management's most difficult, subjective or complex judgments. Different amounts would be reported under different operating conditions or under alternative assumptions. We have evaluated the accounting policies used in the preparation of the accompanying consolidated financial statements and related notes and believe those policies are reasonable and appropriate.
We apply those accounting policies that we believe best reflect the underlying business and economic events, consistent with GAAP. Our more critical accounting policies include those related to long-lived assets, fair value estimates, goodwill impairment and environmental and legal obligations. Inherent in such policies are certain key assumptions and estimates. We periodically update the estimates used in the preparation of the financial statements based on our latest assessment of the current and projected business and general economic environment. Our significant accounting policies are summarized in Note
1
to the consolidated financial statements. We believe the following to be our most critical accounting policies applied in the preparation of our financial statements.
Long-Lived Assets.
Key estimates related to long-lived assets include useful lives, recoverability of carrying values and existence of any retirement obligations. Such estimates could be significantly modified. The carrying values of long-lived assets could be impaired by significant changes or projected changes in supply and demand fundamentals (which would have a negative impact on operating rates or margins), new technological developments, new competitors with significant raw material or other cost advantages, adverse changes associated with the U.S. and world economies, the cyclical nature of the chemical and refining industries and uncertainties associated with governmental actions.
We evaluate long-lived assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, including when negative conditions such as significant current or projected operating losses exist. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and the operational performance of our businesses. Actual impairment losses incurred could vary significantly from amounts estimated. Long-lived assets assessed for impairment are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Additionally, future events could cause us to conclude that impairment indicators exist and that associated long-lived assets of our businesses are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
The estimated useful lives of long-lived assets range from three to 40 years. Depreciation and amortization of these assets, including amortization of deferred turnaround costs, under the straight-line method over their estimated useful lives totaled
$108.8 million
,
$114.0 million
and
$98.2 million
in
2018, 2017 and 2016
, respectively. If the useful lives of the assets were found to be shorter than originally estimated, depreciation or amortization charges would be accelerated.
We defer the costs of planned major maintenance activities, or turnarounds, and amortize the costs over the period until the next planned turnaround of the affected unit. Total costs deferred on turnarounds were
$0.1 million
,
$9.6 million
and
$77.1 million
in
2018, 2017 and 2016
, respectively. Amortization in
2018, 2017 and 2016
of previously deferred turnaround costs was
$20.1 million
,
$22.8 million
and
$20.8 million
, respectively. As of
December 31, 2018
, deferred turnaround costs, net of accumulated amortization, totaled
$56.5 million
. Expensing turnaround costs as incurred would likely result in greater variability of our quarterly operating results and would adversely affect our financial position and results of operations.
Additional information concerning long-lived assets and related depreciation and amortization appears in Notes
5
and
7
to the audited consolidated financial statements included within this report.
Fair Value Estimates.
We develop estimates of fair value to allocate the purchase price paid to acquire a business to the assets acquired and liabilities assumed in an acquisition, to assess impairment of long-lived assets, goodwill and intangible assets and to record derivative instruments. We use all available information to make these fair value determinations, including the engagement of third-party consultants. At December 31,
2018
, recorded goodwill was
$5.8 million
, all of which was associated with the acquisition of the Longview Pipeline as part of the acquisition of Westlake's Longview production facilities. In addition, we record all derivative instruments at fair value. The fair value of the financial instruments is estimated using quoted market prices in active markets and observable market-based inputs or unobservable inputs that are corroborated by market data when active markets are not available or unobservable inputs that are not corroborated by market data.
Goodwill impairment.
Goodwill is evaluated for impairment at least annually, or when events or changes in circumstances indicate the fair value of a reporting unit with goodwill has been reduced below its carrying value. We perform our annual impairment assessment in October. We may elect to perform an optional qualitative assessment to determine whether a quantitative impairment analysis is required. The qualitative assessment considers factors such as macroeconomic conditions, industry and market considerations, cost factors related to raw materials and labor, current and projected financial performance, changes in management or strategy, and market capitalization. Alternatively, we may unconditionally elect to bypass the qualitative assessment and perform a quantitative goodwill impairment assessment in any period. Significant assumptions used in the discounted cash flow projection impairment assessment for goodwill include sales volumes based on production capacities. The future cash flows are discounted to present value using a discount rate. The significant assumptions used in determining the fair value of the reporting unit using the market value methodology include the determination of appropriate market comparables and the estimated multiples of EBITDA a willing buyer is likely to pay. We elected to perform the quantitative assessment during 2018, and such assessment did not indicate impairment of the goodwill. Under the discounted cash flow methodology, even if the fair value of OpCo decreased by
10%
, the carrying value of OpCo would not exceed its fair value.
Environmental and Legal Obligations.
We consult with various professionals to assist us in making estimates relating to environmental costs and legal proceedings. We accrue an expense when we determine that it is probable that a liability has been incurred and the amount is reasonably estimable. While we believe that the amounts recorded in the accompanying consolidated financial statements related to these contingencies are based on the best estimates and judgments available, the actual outcomes could differ from our estimates. Additional information about certain legal proceedings and environmental matters appears in Item 1. Business
—
Environmental and in Note
16
to the consolidated financial statements included within this report.
The Partnership has conditional asset retirement obligations for the removal and disposal of hazardous materials and the remediation of the cause of any such release from certain of the Partnership's manufacturing facilities. However, no asset retirement obligations have been recognized because the fair value of the conditional legal obligation cannot be measured due to the indeterminate settlement date of the obligation. Settlement of these conditional asset retirement obligations is not expected to have a material adverse effect on the Partnership's financial condition, results of operations or cash flows in any individual reporting period.
Recent Accounting Pronouncements
See Note
1
to the consolidated financial statements included within this report for a full description of recent accounting pronouncements, including expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Commodity Price Risk
A substantial portion of the Partnership's products and raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change. However, our direct exposure to commodity price risk is limited to approximately 5% of our total ethylene production, which is the portion sold to third parties. We believe we have substantially mitigated our indirect exposure to commodity price fluctuation during the term of the Ethylene Sales Agreement through the minimum commitment and the cost-plus based pricing. Additionally, we may use short-term derivative instruments to reduce price volatility risk on feedstocks and ethylene associated with the production and sales to third parties. We entered into some of these agreements in December 2018. Based on our open derivative positions as of December 31, 2018, a hypothetical $0.10 increase in the price of a gallon of ethane would have increased our income before taxes by $2.1 million and a hypothetical $0.10 decrease in the price of a pound of ethylene would have increased our income before taxes by $5.0 million.
Interest Rate Risk
We are exposed to interest rate risk with respect to our outstanding debt, all of which is variable rate debt. At
December 31, 2018
, we had variable rate debt of
$477.6 million
outstanding, all of which was owed to wholly-owned subsidiaries of Westlake, and accrues interest at a variable rate of LIBOR plus 200 basis points. The interest rate contract with Westlake to fix the LIBOR component of the interest rate for a portion of the MLP Revolver, which was entered into in August 2015, expired in August 2018. The weighted average variable interest rate of our debt as of
December 31, 2018
was
4.4%
. We will continue to be subject to interest rate risk with respect to our variable rate debt as well as the risk of higher interest cost if and when this debt is refinanced. A hypothetical increase in our average interest rate on variable rate debt by 100 basis points would increase our annual interest expense by approximately $
4.8 million
, based on the
December 31, 2018
debt balance.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
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Page
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Management's Report on Internal Control over Financial Reporting
|
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2018 and 2017
|
|
Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016
|
|
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2018, 2017 and 2016
|
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
|
|
Notes to Consolidated Financial Statements
|
|
Financial statement schedules not included in this Form 10-K have been omitted because they are not applicable or because the required information is shown in the consolidated financial statements or notes thereto.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Westlake Chemical Partners LP (the "Partnership") is responsible for establishing and maintaining adequate internal control over financial reporting. The Partnership's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
The management of the Partnership assessed the effectiveness of the Partnership's internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control—Integrated Framework
(2013). Based on its assessment, Partnership's management has concluded that the Partnership's internal control over financial reporting was effective as of December 31, 2018 based on those criteria.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, has also audited the effectiveness of internal control over financial reporting as of December 31, 2018 as stated in their report that appears on the following page.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of Westlake Chemical Partners LP and
Board of Directors of Westlake Chemical Partners GP LLC
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Westlake Chemical Partners LP and its subsidiaries (the "Partnership") as of December 31, 2018 and 2017,
and the related consolidated statements of operations, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the "consolidated
financial statements").
We also have audited the Partnership's internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Partnership as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework
(2013) issued by the COSO.
Basis for Opinions
The Partnership's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Partnership’s consolidated financial statements and on the Partnership's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP
Houston, Texas
March 1, 2019
We have served as the Partnership’s auditor since 2014.
WESTLAKE CHEMICAL PARTNERS LP
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
December 31,
2017
|
|
|
|
|
|
|
|
(in thousands of dollars,
except unit amounts)
|
ASSETS
|
|
|
|
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,744
|
|
|
$
|
27,008
|
|
Receivable under the Investment Management Agreement—Westlake Chemical
Corporation ("Westlake")
|
|
148,956
|
|
|
136,510
|
|
Accounts receivable, net—Westlake Chemical Corporation ("Westlake")
|
|
57,280
|
|
|
43,884
|
|
Accounts receivable, net—third parties
|
|
16,404
|
|
|
18,083
|
|
Inventories
|
|
4,388
|
|
|
5,590
|
|
Prepaid expenses and other current assets
|
|
370
|
|
|
314
|
|
Total current assets
|
|
247,142
|
|
|
231,389
|
|
Property, plant and equipment, net
|
|
1,148,265
|
|
|
1,196,245
|
|
Goodwill
|
|
5,814
|
|
|
5,814
|
|
Deferred charges and other assets, net
|
|
60,904
|
|
|
81,828
|
|
Total assets
|
|
$
|
1,462,125
|
|
|
$
|
1,515,276
|
|
LIABILITIES
|
|
|
|
|
Current liabilities
|
|
|
|
|
Accounts payable—Westlake
|
|
$
|
27,477
|
|
|
$
|
14,027
|
|
Accounts payable—third parties
|
|
5,045
|
|
|
10,516
|
|
Accrued liabilities
|
|
16,250
|
|
|
15,697
|
|
Total current liabilities
|
|
48,772
|
|
|
40,240
|
|
Long-term debt payable to Westlake
|
|
477,608
|
|
|
473,960
|
|
Deferred income taxes
|
|
1,664
|
|
|
2,220
|
|
Other liabilities
|
|
—
|
|
|
107
|
|
Total liabilities
|
|
528,044
|
|
|
516,527
|
|
Commitments and contingencies (Note 16)
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
Common unitholders—public (18,125,141 and 18,112,500 units issued and outstanding at
December 31, 2018 and December 31, 2017, respectively)
|
|
409,608
|
|
|
411,228
|
|
Common unitholder—Westlake (14,122,230 and 14,122,230 units issued and outstanding at
December 31, 2018 and December 31, 2017, respectively)
|
|
48,774
|
|
|
50,265
|
|
General partner—Westlake
|
|
(242,572
|
)
|
|
(241,958
|
)
|
Accumulated other comprehensive income
|
|
—
|
|
|
279
|
|
Total Westlake Chemical Partners LP partners' capital
|
|
215,810
|
|
|
219,814
|
|
Noncontrolling interest in Westlake Chemical OpCo LP ("OpCo")
|
|
718,271
|
|
|
778,935
|
|
Total equity
|
|
934,081
|
|
|
998,749
|
|
Total liabilities and equity
|
|
$
|
1,462,125
|
|
|
$
|
1,515,276
|
|
The accompanying notes are an integral part of the consolidated financial statements.
WESTLAKE CHEMICAL PARTNERS LP
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
(in thousands of dollars,
except unit amounts and per unit data)
|
Revenue
|
|
|
|
|
|
|
Net sales—Westlake
|
|
$
|
1,074,957
|
|
|
$
|
973,081
|
|
|
$
|
853,719
|
|
Net co-products, ethylene and other sales—third parties
|
|
210,665
|
|
|
199,900
|
|
|
133,017
|
|
Total net sales
|
|
1,285,622
|
|
|
1,172,981
|
|
|
986,736
|
|
Cost of sales
|
|
908,463
|
|
|
769,314
|
|
|
595,405
|
|
Gross profit
|
|
377,159
|
|
|
403,667
|
|
|
391,331
|
|
Selling, general and administrative expenses
|
|
27,590
|
|
|
29,260
|
|
|
24,887
|
|
Income from operations
|
|
349,569
|
|
|
374,407
|
|
|
366,444
|
|
Other income (expense)
|
|
|
|
|
|
|
Interest expense—Westlake
|
|
(21,433
|
)
|
|
(21,861
|
)
|
|
(12,607
|
)
|
Other income, net
|
|
2,457
|
|
|
1,792
|
|
|
601
|
|
Income before income taxes
|
|
330,593
|
|
|
354,338
|
|
|
354,438
|
|
Provision for income taxes
|
|
22
|
|
|
1,280
|
|
|
1,035
|
|
Net income
|
|
330,571
|
|
|
353,058
|
|
|
353,403
|
|
Less: Net income attributable to noncontrolling interest in OpCo
|
|
281,224
|
|
|
304,388
|
|
|
312,463
|
|
Net income attributable to Westlake Chemical Partners LP and limited
partners' interest in net income
|
|
$
|
49,347
|
|
|
$
|
48,670
|
|
|
$
|
40,940
|
|
Net income attributable to Westlake Chemical Partners LP per limited partner
unit (basic and diluted)
|
|
|
|
|
|
|
Common units
|
|
$
|
1.51
|
|
|
$
|
1.72
|
|
|
$
|
1.50
|
|
Subordinated units
|
|
$
|
—
|
|
|
$
|
1.43
|
|
|
$
|
1.50
|
|
Weighted average limited partner units outstanding
(basic and diluted)
|
|
|
|
|
|
|
Common units—public
|
|
18,118,628
|
|
|
14,270,240
|
|
|
12,937,500
|
|
Common units—Westlake
|
|
14,122,230
|
|
|
7,831,307
|
|
|
1,436,115
|
|
Subordinated units—Westlake
|
|
—
|
|
|
6,290,923
|
|
|
12,686,115
|
|
The accompanying notes are an integral part of the consolidated financial statements.
WESTLAKE CHEMICAL PARTNERS LP
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership
|
|
|
|
|
|
|
Common Unitholders -
Public
|
|
Common Unitholder -
Westlake
|
|
Subordinated Unitholder -
Westlake
|
|
General
Partner -
Westlake
|
|
Accumulated
Other
Comprehensive
Income
|
|
Noncontrolling Interest
in OpCo
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of dollars)
|
Balances at December 31, 2015
|
|
$
|
294,565
|
|
|
$
|
4,502
|
|
|
$
|
39,786
|
|
|
$
|
(242,572
|
)
|
|
$
|
280
|
|
|
$
|
750,606
|
|
|
$
|
847,167
|
|
Net income
|
|
19,440
|
|
|
2,157
|
|
|
19,062
|
|
|
281
|
|
|
—
|
|
|
312,463
|
|
|
353,403
|
|
Net effect of cash flow hedge
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(80
|
)
|
|
—
|
|
|
(80
|
)
|
Quarterly distribution to unitholders
|
|
(16,638
|
)
|
|
(1,846
|
)
|
|
(16,314
|
)
|
|
(139
|
)
|
|
—
|
|
|
—
|
|
|
(34,937
|
)
|
Quarterly distribution to noncontrolling interest retained in OpCo by Westlake
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(244,590
|
)
|
|
(244,590
|
)
|
Balances at December 31, 2016
|
|
$
|
297,367
|
|
|
$
|
4,813
|
|
|
$
|
42,534
|
|
|
$
|
(242,430
|
)
|
|
$
|
200
|
|
|
$
|
818,479
|
|
|
$
|
920,963
|
|
Net income
|
|
23,743
|
|
|
9,934
|
|
|
13,327
|
|
|
1,666
|
|
|
—
|
|
|
304,388
|
|
|
353,058
|
|
Net effect of cash flow hedge
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
79
|
|
|
—
|
|
|
79
|
|
Proceeds from secondary public offering,
net of finance and other offering costs
|
|
110,698
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
110,698
|
|
Subordinated unit conversion
|
|
—
|
|
|
42,352
|
|
|
(42,352
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Quarterly distribution to unitholders
|
|
(20,580
|
)
|
|
(6,834
|
)
|
|
(13,509
|
)
|
|
(1,194
|
)
|
|
—
|
|
|
—
|
|
|
(42,117
|
)
|
Quarterly distribution to noncontrolling
interest retained in OpCo by Westlake
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(343,932
|
)
|
|
(343,932
|
)
|
Balances at December 31, 2017
|
|
$
|
411,228
|
|
|
$
|
50,265
|
|
|
$
|
—
|
|
|
$
|
(241,958
|
)
|
|
$
|
279
|
|
|
$
|
778,935
|
|
|
$
|
998,749
|
|
Net income
|
|
27,320
|
|
|
21,294
|
|
|
—
|
|
|
733
|
|
|
—
|
|
|
281,224
|
|
|
330,571
|
|
Net effect of cash flow hedge
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(279
|
)
|
|
—
|
|
|
(279
|
)
|
Units issued for vested phantom units
|
|
291
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
291
|
|
Quarterly distribution to unitholders
|
|
(29,231
|
)
|
|
(22,785
|
)
|
|
—
|
|
|
(1,347
|
)
|
|
—
|
|
|
—
|
|
|
(53,363
|
)
|
Quarterly distribution to noncontrolling
interest retained in OpCo by Westlake
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(341,888
|
)
|
|
(341,888
|
)
|
Balances at December 31, 2018
|
|
$
|
409,608
|
|
|
$
|
48,774
|
|
|
$
|
—
|
|
|
$
|
(242,572
|
)
|
|
$
|
—
|
|
|
$
|
718,271
|
|
|
$
|
934,081
|
|
The accompanying notes are an integral part of the consolidated financial statements.
WESTLAKE CHEMICAL PARTNERS LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
(in thousands of dollars)
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
|
$
|
330,571
|
|
|
$
|
353,058
|
|
|
$
|
353,403
|
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
|
|
|
|
Depreciation and amortization
|
|
108,842
|
|
|
113,985
|
|
|
98,210
|
|
Loss from disposition of property, plant and equipment
|
|
1,849
|
|
|
3,033
|
|
|
3,021
|
|
Other losses (gains), net
|
|
(347
|
)
|
|
(1,040
|
)
|
|
738
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
Accounts receivable—third parties
|
|
1,470
|
|
|
(6,146
|
)
|
|
(552
|
)
|
Net accounts receivable—Westlake
|
|
(442
|
)
|
|
84,652
|
|
|
(90,742
|
)
|
Inventories
|
|
1,202
|
|
|
(1,656
|
)
|
|
(55
|
)
|
Prepaid expenses and other current assets
|
|
(56
|
)
|
|
(45
|
)
|
|
(2
|
)
|
Accounts payable
|
|
(4,476
|
)
|
|
1,442
|
|
|
(2,175
|
)
|
Accrued and other liabilities
|
|
(1,974
|
)
|
|
(9
|
)
|
|
3,791
|
|
Other, net
|
|
(488
|
)
|
|
(9,917
|
)
|
|
(77,911
|
)
|
Net cash provided by operating activities
|
|
436,151
|
|
|
537,357
|
|
|
287,726
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
(39,862
|
)
|
|
(68,858
|
)
|
|
(299,638
|
)
|
Maturities of investments with Westlake under the Investment Management
Agreement
|
|
372,050
|
|
|
62,828
|
|
|
—
|
|
Investments with Westlake under the Investment Management Agreement
|
|
(384,000
|
)
|
|
(199,000
|
)
|
|
—
|
|
Other
|
|
—
|
|
|
1,801
|
|
|
157
|
|
Net cash used for investing activities
|
|
(51,812
|
)
|
|
(203,229
|
)
|
|
(299,481
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
Net proceeds from common equity offering
|
|
—
|
|
|
110,698
|
|
|
—
|
|
Proceeds from debt payable to Westlake
|
|
3,648
|
|
|
165,257
|
|
|
212,175
|
|
Repayment of debt payable to Westlake
|
|
—
|
|
|
(285,926
|
)
|
|
(1,552
|
)
|
Quarterly distributions to noncontrolling interest retained in OpCo by
Westlake
|
|
(341,888
|
)
|
|
(343,932
|
)
|
|
(244,590
|
)
|
Quarterly distributions to unitholders
|
|
(53,363
|
)
|
|
(42,117
|
)
|
|
(34,937
|
)
|
Net cash used for financing activities
|
|
(391,603
|
)
|
|
(396,020
|
)
|
|
(68,904
|
)
|
Net decrease in cash and cash equivalents
|
|
(7,264
|
)
|
|
(61,892
|
)
|
|
(80,659
|
)
|
Cash and cash equivalents at beginning of the year
|
|
27,008
|
|
|
88,900
|
|
|
169,559
|
|
Cash and cash equivalents at end of the year
|
|
$
|
19,744
|
|
|
$
|
27,008
|
|
|
$
|
88,900
|
|
The accompanying notes are an integral part of the consolidated financial statements.
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars, except unit amounts and per unit data)
1.
Description of Business and Significant Accounting Policies
Description of Business
Westlake Chemical Partners LP ("Westlake Chemical Partners LP" or the "Partnership") is a Delaware limited partnership formed in March 2014 to operate, acquire and develop ethylene production facilities and related assets. On August 4, 2014, the Partnership completed its initial public offering (the "IPO") of
12,937,500
common units representing limited partner interests. On September 29, 2017, the Partnership completed its secondary offering of
5,175,000
common units at a price of
$22.00
per unit.
In connection with the IPO, the Partnership acquired a
10.6%
interest in Westlake Chemical OpCo LP ("OpCo") and a
100%
interest in Westlake Chemical OpCo GP LLC ("OpCo GP"), which is the general partner of OpCo. OpCo owns
three
ethylene production facilities and a common carrier ethylene pipeline (collectively, the "Contributed Assets"). On April 29, 2015, the Partnership purchased an additional
2.7%
newly-issued limited partner interest in OpCo for approximately
$135,341
, resulting in an aggregate
13.3%
limited partner interest in OpCo effective April 1, 2015. On September 29, 2017, the Partnership purchased an additional
5.0%
newly-issued limited partner interest in OpCo for approximately
$229,207
, resulting in an aggregate
18.3%
limited partner interest in OpCo, effective as of July 1, 2017. The remaining
81.7%
limited partner interest in OpCo is owned by Westlake Chemical Corporation. References to "Westlake" refer collectively to Westlake Chemical Corporation and its subsidiaries, other than the Partnership, OpCo and OpCo GP.
OpCo and Westlake entered into an ethylene sales agreement (the "Ethylene Sales Agreement") pursuant to which the Partnership generates a substantial majority of its revenue. For more information, see Note
2
.
The Partnership sells ethylene production in excess of volumes sold to Westlake, as well as all of the co-products resulting from the ethylene production, including propylene, crude butadiene, pyrolysis gasoline and hydrogen, directly to third parties on either a spot or contract basis. Co-products sold to third parties are transported by rail or truck. Net proceeds (after transportation and other costs) from the sales of ethylene co-products that result from the production of ethylene purchased by Westlake are netted against the ethylene price charged to Westlake under the Ethylene Sales Agreement, thereby reducing the Partnership's exposure to fluctuations in the market prices of these co-products.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with the accounting principles generally accepted in the United States.
The Partnership holds a
18.3%
limited partner interest and the entire non-economic general partner interest in OpCo. The remaining
81.7%
limited partner interest in OpCo is owned directly by Westlake, which has no rights to direct the activities that most significantly impact the economic performance of OpCo. As a result of the fact that substantially all of OpCo's activities are conducted on behalf of Westlake, and the fact that OpCo exhibits disproportionality of voting rights to economic interest, OpCo was deemed to be a variable interest entity. The Partnership, through its ownership of OpCo's general partner, has the power to direct the activities that most significantly impact the economic performance of OpCo, and it also has the obligation or right to absorb losses or receive benefits from OpCo that could potentially be significant to OpCo. As such, the Partnership was determined to be OpCo's primary beneficiary and therefore consolidates OpCo's results of operations and financial position. Westlake's retained interest of
81.7%
is recorded as noncontrolling interest in the Partnership's consolidated financial statements.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments that are readily convertible into cash and have a maturity of three months or less at the date of acquisition.
Allowance for Doubtful Accounts
The determination of the allowance for doubtful accounts is based on estimation of the amount of accounts receivable that the Partnership believes are unlikely to be collected. Estimating this amount requires analysis of the financial strength of the Partnership's customers, the use of historical experience, the Partnership's accounts receivable aged trial balance and specific collectability analysis. The allowance for doubtful accounts is reviewed quarterly. Past due balances over
90
days and high risk accounts, as determined by the analysis of financial strength of customers, are reviewed individually for collectability.
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
Inventories
Inventories primarily include product, material and supplies. Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out ("FIFO") or average method.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, net of accumulated depreciation. Cost includes expenditures for improvements and betterments that extend the useful lives of the assets and interest capitalized on significant capital projects.
Interest expense is capitalized for qualifying assets under construction. Capitalized interest costs are included in property, plant and equipment and are depreciated over the useful life of the related asset. Capitalized interest was
$175
,
$435
and
$5,961
for the years ended
December 31, 2018
,
2017
and
2016
. Repair and maintenance costs are charged to operations as incurred. Gains and losses on the disposal or retirement of property, plant and equipment are reflected in the statement of operations when the assets are sold or retired.
The accounting guidance for asset retirement obligations requires the recording of liabilities equal to the fair value of asset retirement obligations and corresponding additional asset costs, when there is a legal asset retirement obligation as a result of existing or enacted law, statute or contract. The Partnership has conditional asset retirement obligations for the removal and disposal of hazardous materials from certain of the Partnership's manufacturing facilities. However, no asset retirement obligations have been recognized because the fair value of the conditional legal obligation cannot be measured due to the indeterminate settlement date of the obligation. Settlement of these conditional asset retirement obligations is not expected to have a material adverse effect on the Partnership's financial condition, results of operations or cash flows in any individual reporting period.
Depreciation is provided by utilizing the straight-line method over the estimated useful lives of the assets as follows:
|
|
|
|
Classification
|
|
Years
|
|
|
|
Buildings and improvements
|
40
|
Plant and equipment
|
25
|
Ethylene pipeline
|
35
|
Other
|
3-15
|
Impairment of Long-Lived Assets
The accounting guidance for the impairment or disposal of long-lived assets requires that the Partnership assess long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, including when negative conditions such as significant current or projected operating losses exist. Other factors considered by the Partnership when determining if an impairment assessment is necessary include, but are not limited to, significant changes or projected changes in supply and demand fundamentals (which would have a negative impact on operating rates or margins), new technological developments, new competitors with significant raw material or other cost advantages, adverse changes associated with the United States and world economies and uncertainties associated with governmental actions. Long-lived assets assessed for impairment are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. Assets are considered to be impaired if the carrying amount of an asset exceeds the future undiscounted cash flows. The impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or estimated fair value less costs to sell.
Impairment of Goodwill and Intangible Assets
The accounting guidance requires that goodwill be tested for impairment at least annually, or when events or changes in circumstances indicate the fair value of a reporting unit with goodwill has been reduced below its carrying value. The impairment test for the recorded goodwill was performed in October
2018
and did not indicate impairment of the goodwill. Other intangible assets with finite lives are amortized over their estimated useful life and reviewed for impairment in accordance with the provisions of the accounting guidance. As of
December 31, 2018
, the Partnership's recorded goodwill was
$5,814
. See Note
6
for more information on the Partnership's annual goodwill impairment test.
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
Turnaround Costs
The Partnership accounts for turnaround costs under the deferral method. Turnarounds are the scheduled and required shutdowns of specific operating units in order to perform planned major maintenance activities. The costs related to the significant overhaul and refurbishment activities include maintenance materials, parts and direct labor costs. The costs of the turnaround are deferred when incurred at the time of the turnaround and amortized (within depreciation and amortization) on a straight-line basis until the next planned turnaround, which ranges from
three
to
six
years. Deferred turnaround costs are presented as a component of other assets, net. The cash outflows related to these costs are included in operating activities in the consolidated statement of cash flows.
Concentration of Credit Risk
Financial instruments which potentially subject the Partnership to concentration of risk consist principally of trade receivables from third-party customers who purchase ethylene and ethylene co-products. The Partnership performs periodic credit evaluations, as applicable, of the customers' financial condition and generally does not require collateral. The Partnership maintains allowances for potential losses, as applicable.
Revenue Recognition
Revenue is recognized when OpCo transfers control of inventories to customers. Amounts recognized as revenues reflect the consideration to which OpCo expects to be entitled in exchange for those inventories. The Partnership and OpCo incorporate production volume and production cost forecasts in the estimated transaction prices from sales to Westlake under the Ethylene Sales Agreement.
The Partnership recognizes revenue and accounts receivable upon transferring control of inventories to its customers. Ethylene sold to Westlake under the Ethylene Sales Agreement is transferred to Westlake immediately after production and recognized in sales. Control of inventories sold to third parties generally transfers upon shipment to the customer. The Partnership excludes taxes collected on behalf of customers from the estimated contract price. Provisions for discounts, rebates and returns are incorporated in the estimate of variable consideration and reflected as reduction to revenue in the same period as the related sales.
The Partnership does not disclose the value of unsatisfied performance obligations because its contracts with customers (1) have an original expected duration of one year or less or (2) have only variable consideration which is allocated to wholly unsatisfied performance obligations that is calculated based on market prices at a specified date and is allocated to wholly unsatisfied performance obligations.
The Partnership generates a substantial majority of its revenue from sales to Westlake under the Ethylene Sales Agreement. The Ethylene Sales Agreement is intended to generate a long-term, fixed cash margin per pound. Partnership’s direct commodity price risk is limited to the sales to third parties. See the Partnership’s consolidated statement of operations for the disaggregation of net sales to Westlake and net sales to third parties.
Prior to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers ("ASC 606"), on January 1, 2018, the revenue was recognized when persuasive evidence of an arrangement existed, products were delivered to the customer, the sales price was fixed or determinable, and collectability was reasonably assured. Title and risk of loss had passed to the customer upon delivery under executed customer purchase orders or contracts.
Transportation and Freight
Amounts billed to customers for freight and handling costs on outbound shipments are included in net sales in the consolidated statements of operations. Transportation and freight costs incurred by the Partnership on outbound shipments are included in cost of sales in the consolidated statements of operations.
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
Derivative Instruments
The accounting guidance for derivative instruments and hedging activities requires that the Partnership recognize all derivative instruments on the balance sheet at fair value, and changes in the derivative's fair value must be currently recognized in earnings or comprehensive income, depending on the designation of the derivative. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded in comprehensive income and is recognized in the statement of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings currently.
Environmental Costs
Environmental costs relating to current operations are expensed or capitalized, as appropriate, depending on whether such costs provide future economic benefits. Remediation liabilities are recognized when the costs are considered probable and can be reasonably estimated. Measurement of liabilities is based on currently enacted laws and regulations, existing technology and undiscounted site-specific costs. Environmental liabilities in connection with properties that are sold or closed are realized upon such sale or closure, to the extent they are probable and estimable and not previously reserved. Recognition of any joint and several liabilities is based upon the Partnership's best estimate of its final pro rata share of the liability.
Income Taxes
The Partnership is a limited partnership and is treated as a partnership for U.S. federal income tax purposes and, therefore, is not liable for entity-level federal income taxes. The Partnership is, however, subject to state and local income taxes. Deferred tax expense or benefit is the result of changes in the deferred tax assets and liabilities during the period. Valuation allowances are recorded against deferred tax assets when it is considered more likely than not that the deferred tax assets will not be realized on a separate tax return basis.
Segment Reporting
The Partnership only operates one segment (ethylene production) and all of its operations are located in the United States.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
Other Comprehensive Income
The Partnership has not reported consolidated statements of comprehensive income for the years ended
December 31, 2018
,
2017
and
2016
due to immateriality of the components of other comprehensive income.
Recent Accounting Pronouncements
Leases (ASU No. 2016-02)
In February 2016, the FASB issued an accounting standards update on a new lease standard that will supersede the existing lease guidance. The standard requires a lessee to recognize assets and liabilities related to long-term leases that are classified as operating leases under current guidance on its balance sheet. An asset would be recognized related to the right to use the underlying asset and a liability would be recognized related to the obligation to make lease payments over the term of the lease. The standard also requires expanded disclosures related to leases. The standard requires adoption using a modified retrospective approach and allows for the election of certain transition practical expedients. The accounting standards update allows for certain transition expedients for leases that commenced prior to the adoption of the new standard. Under the optional transition expedients an entity is not required to reassess (1) whether any expired or existing lease contracts are or contain leases, (2) the classification of leases as operating or capital leases and (3) whether any initial direct costs qualify for capitalization under the new accounting standard. These expedients are required to be elected as a group. The accounting standards update also allows the use of hindsight to determine the lease term when considering lease renewal or termination options.
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
During 2018, the FASB issued additional authoritative guidance that provides an optional transition method which allows entities to continue applying the existing lease guidance in the comparative periods and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The FASB also issued an accounting standards update that allows entities to apply their existing policy for accounting for land easements that exist as of, or expired before, the effective date of the new lease standard.
The accounting standard is effective for reporting periods beginning after December 15, 2018 and is not expected to have a material impact on the Partnership's consolidated financial position, results of operations and cash flows.
Credit Losses (ASU No. 2016-13)
In June 2016, the FASB issued an accounting standards update providing new guidance for the accounting for credit losses on loans and other financial instruments. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. The standard also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The accounting standard will be effective for reporting periods beginning after December 15, 2019 and is not
expected to have a material impact on the Partnership's consolidated financial position, results of operations and cash flows.
Fair Value Measurement (ASU No. 2018-13)
In August 2018, the FASB issued an accounting standards update to modify the disclosure requirements on fair value measurements. The amendments are effective beginning after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until the effective date. Most amendments should be applied retrospectively but certain amendments should be applied prospectively. The Partnership is in the process of evaluating the impact that the new accounting guidance will have on the Partnership's consolidated financial position, results of operations and cash flows.
Recently Adopted Accounting Standards
Revenue from Contracts with Customers (ASU No. 2014-09)
In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update on a comprehensive new revenue recognition standard that supersedes virtually all previously issued revenue recognition guidance. The new accounting guidance creates a framework by which an entity will allocate the transaction price to separate performance obligations and recognize revenue when each performance obligation is satisfied. Under the new standard, entities are required to use judgment and make estimates, including identifying performance obligations in a contract, estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation and determining when an entity satisfies its performance obligations. The standard allows for "modified retrospective" adoption, meaning the standard is applied only to the most current period presented in the financial statements with a cumulative catch-up as of the current period.
The Partnership adopted ASU No. 2014-09, Revenue from Contracts with Customers, effective January 1, 2018. The Partnership applied the modified retrospective transition method to all contracts that were not completed as of the adoption date. Periods prior to January 1, 2018 were not adjusted and are reported under the accounting standards that were in place during those periods. There was no cumulative effect to the Partnership’s consolidated January 1, 2018 balance sheet for the adoption of this accounting standard. There was no impact of ASC 606 adoption on the financial statements for the
year ended December 31, 2018
as compared with the guidance that was in effect prior to January 1, 2018.
Cash Flows (ASU No. 2016-15)
In August 2016, the FASB issued an accounting standards update providing new guidance on the classification of certain cash receipts and payments including debt extinguishment costs, debt prepayment costs, settlement of zero-coupon debt instruments, contingent consideration payments, proceeds from the settlement of insurance claims and life insurance policies and distributions received from equity method investees in the statement of cash flows. This update is required to be applied using the retrospective transition method to each period presented unless it is impracticable to be applied retrospectively. In such situation, this guidance is to be applied prospectively. The accounting standard became effective for reporting periods beginning after December 15, 2017. The Partnership adopted this accounting standard effective January 1, 2018, and the adoption did not have any impact on the Partnership's consolidated financial position, results of operations and cash flow.
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
Business Combinations (ASU No. 2017-01)
In January 2017, the FASB issued an accounting standard update to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. The accounting standard became effective for reporting periods beginning after December 15, 2017. The Partnership adopted this accounting standard effective January 1, 2018, and the adoption did not have any impact on the Partnership's consolidated financial position, results of operations and cash flow.
Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (ASU No. 2017-05)
In February 2017, the FASB issued an accounting standards update to clarify the scope of guidance related to other income—gains and losses from the derecognition of nonfinancial assets, and to add guidance for partial sales of nonfinancial assets. The new guidance clarifies that an in substance nonfinancial asset is an asset or group of assets for which substantially all of the fair value consists of nonfinancial assets and the group or subsidiary is not a business. The guidance also outlines that when an entity transfers its controlling interest in a nonfinancial asset, but retains a noncontrolling interest, it will measure the retained interest at fair value resulting in full gain or loss recognition upon sale of the controlling interest. The accounting standard became effective for reporting periods beginning after December 15, 2017. The Partnership adopted this accounting standard effective January 1, 2018, and the adoption did not have any impact on the Partnership's consolidated financial position, results of operations and cash flow.
Intangibles - Goodwill and Other (ASU No. 2018-15)
In August 2018, the FASB issued an accounting standards update to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The amendments are effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Partnership adopted this accounting standard effective October 1, 2018, and the adoption did not have a material impact on the Partnership's consolidated financial position, results of operations and cash flow.
2.
Agreements with Westlake and Related Parties
Ethylene Sales Agreement
OpCo has entered into a
12
-year ethylene sales agreement with Westlake (the "Ethylene Sales Agreement"). The Ethylene Sales Agreement requires Westlake to purchase a minimum volume of ethylene each year equal to
95%
of OpCo's planned ethylene production per year (the "Minimum Commitment"), subject to certain exceptions and a maximum commitment of
3.8 billion
pounds per year. So long as Westlake is not in default under the Ethylene Sales Agreement, if OpCo's actual production exceeds planned production, Westlake has the option to purchase up to
95%
of the excess production (the "Excess Production Option").
The fee for each pound of ethylene purchased by Westlake from OpCo up to the Minimum Commitment in any calendar year will equal:
|
|
•
|
the actual price OpCo pays Westlake to purchase ethane (or other feedstock, such as propane, if applicable) to produce each pound of ethylene, subject to a specified cap and a floor on the amount of feedstock that should be needed to produce each pound of ethylene; plus
|
|
|
•
|
the actual price OpCo pays Westlake to purchase natural gas to produce each pound of ethylene, subject to a specified cap and a floor on the amount of natural gas that should be needed to produce each pound of ethylene; plus
|
|
|
•
|
OpCo's estimated operating costs (including selling, general and administrative expenses), divided by OpCo's planned ethylene production for the year (in pounds); plus
|
|
|
•
|
a
five
-year average of OpCo's expected future maintenance capital expenditures and other turnaround expenditures, divided by OpCo's planned ethylene production capacity for the year (in pounds); less
|
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
|
|
•
|
the proceeds (on a per pound of ethylene basis) received by OpCo from the sale of co-products (including, but not limited to, propylene, crude butadiene, pyrolysis gasoline and hydrogen) associated with producing the ethylene purchased by Westlake; plus
|
|
|
•
|
a
$0.10
per pound margin.
|
The fee for the Excess Production Option, if exercised, equals OpCo's estimated variable operating costs of producing the incremental ethylene, net of revenues from co-products sales plus a
$0.10
per pound margin.
The estimated operating costs and the expected future maintenance capital expenditures and other turnaround expenditures will be adjusted at the end of each year, to be applicable for the fee for the next calendar year, to reflect certain changes in forecasted costs.
The result of the fee structure is that OpCo should recover the portion of its total operating costs and maintenance capital expenditures and other turnaround expenditures corresponding to the portion of OpCo's aggregate production that is purchased by Westlake. Any shortfall in recovery of such costs is recognized during the current year and is recoverable from Westlake in the subsequent year.
The Ethylene Sales Agreement has an initial term extending until December 31, 2026 and automatically renews thereafter for successive
12
-month terms unless terminated.
On November 1, 2018, OpCo and Westlake entered into an amendment to the Ethylene Sales Agreement in order to provide OpCo with the option to curtail up to approximately
5%
of its ethylene production annually in the event OpCo reasonably determines that its sales of such ethylene to third parties during the relevant period would be uneconomic.
Feedstock Supply Agreement
OpCo has entered into a feedstock supply agreement with Westlake, pursuant to which Westlake sells to OpCo ethane and other feedstock in amounts sufficient for OpCo to produce the ethylene to be sold under the Ethylene Sales Agreement (the "Feedstock Supply Agreement"). The Feedstock Supply Agreement provides that OpCo may obtain feedstock from Westlake based on Westlake's total cost of purchasing and delivering the feedstock, including applicable transportation, storage and other costs. Title and risk of loss for all feedstock purchased by OpCo through the Feedstock Supply Agreement passes to OpCo upon delivery to one of three delivery points described in the Feedstock Supply Agreement.
The Feedstock Supply Agreement has an initial term extending until December 31, 2026 and automatically renews thereafter for successive
12
-month terms unless terminated by either party; provided, however, that such agreement can only be renewed in the event the Ethylene Sales Agreement is renewed simultaneously. The Feedstock Supply Agreement may, in certain circumstances, terminate concurrently with the termination of the Ethylene Sales Agreement.
Services and Secondment Agreement
OpCo has entered into a Services and Secondment Agreement with Westlake, pursuant to which OpCo provides Westlake with certain services required for the operation of Westlake's facilities; and Westlake provides OpCo with comprehensive operating services for OpCo's facilities, ranging from services relating to the maintenance and operations of the common facilities necessary for the operation of OpCo's units, to making available certain shared utilities such as electricity and natural gas that are necessary for the operation of OpCo's units. Westlake also seconds employees to OpCo to allow OpCo to operate its facilities. Such seconded employees are under the control of OpCo while they work on OpCo's facilities.
The Services and Secondment Agreement has an initial
12
-year term. The Services and Secondment Agreement may be renewed thereafter upon agreement of the parties and shall automatically terminate if the Ethylene Sales Agreement terminates under certain circumstances. Westlake and OpCo each can terminate the Services and Secondment Agreement under certain circumstances, including if the other party materially defaults on the performance of its obligations and such default continues for a
30
-day period.
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
Site Lease Agreements
OpCo has entered into
two
site lease agreements with Westlake pursuant to which Westlake leases to OpCo the real property underlying Lake Charles Olefins and Calvert City Olefins, respectively, and grants OpCo rights to access and use certain other portions of Westlake's ethylene production facilities that are necessary to operate OpCo's production facilities. OpCo owes Westlake
one
dollar per site per year. The site lease agreements each have a term of
50
years. Each of the site lease agreements may be renewed if agreed by the parties.
Omnibus Agreement
The Partnership has entered into an Omnibus Agreement with Westlake that addresses (1) Westlake's indemnification of the Partnership for certain matters, including environmental and tax matters, (2) the provision by Westlake of certain management and other general and administrative services to the Partnership and its general partner and (3) the Partnership's reimbursement to Westlake for such services. The Omnibus Agreement also addresses Westlake's right of first refusal on any proposed transfer of the ethylene production facilities that serve Westlake's other facilities and Westlake's right of first refusal on any proposed transfer of the Partnership's equity interests in OpCo.
Exchange Agreement
OpCo and Westlake are parties to an exchange agreement, which had an initial term through August 1, 2015 and is continuing year to year thereafter, unless and until terminated by either party. Under the exchange agreement, OpCo may require Westlake to deliver up to
200 million
pounds of ethylene for OpCo per year from the Site Leases to an ethylene hub in Mt. Belvieu, Texas, for which OpCo would be required to pay an exchange fee of
$0.006
per pound.
OpCo Partnership Agreement
The Partnership, OpCo GP and Westlake are parties to an agreement of limited partnership for OpCo (the "OpCo LP Agreement"). The OpCo LP Agreement governs the ownership and management of OpCo and designates OpCo GP as the general partner of OpCo. OpCo GP generally has complete authority to manage OpCo's business and affairs. The Partnership controls OpCo GP, as its sole member, subject to certain approval rights held by Westlake.
Investment Management Agreement
The Partnership, OpCo and Westlake are parties to an Investment Management Agreement that authorizes Westlake to invest the Partnership and OpCo’s excess cash with Westlake for a term of up to a maximum of
nine
months. Per the terms of the Investment Management Agreement, the Partnership earns a market return plus five basis points and Westlake provides daily availability of the invested cash to meet any liquidity needs of the Partnership or OpCo. The Partnership had
$149.0 million
of invested cash under the Investment Management Agreement at
December 31, 2018
.
3.
Accounts Receivable—Third Parties
Accounts receivable—third parties consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
Trade customers
|
|
$
|
17,325
|
|
|
$
|
18,794
|
|
Allowance for doubtful accounts
|
|
(921
|
)
|
|
(711
|
)
|
Accounts receivable, net—third parties
|
|
$
|
16,404
|
|
|
$
|
18,083
|
|
4.
Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
Finished products
|
|
$
|
3,876
|
|
|
$
|
5,244
|
|
Feedstock, additives and chemicals
|
|
512
|
|
|
346
|
|
Inventories
|
|
$
|
4,388
|
|
|
$
|
5,590
|
|
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
5.
Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
Building and improvements
|
|
$
|
17,426
|
|
|
$
|
17,174
|
|
Plant and equipment
|
|
1,804,684
|
|
|
1,773,070
|
|
Other
|
|
88,077
|
|
|
83,167
|
|
|
|
1,910,187
|
|
|
1,873,411
|
|
Less: Accumulated depreciation
|
|
(795,167
|
)
|
|
(716,299
|
)
|
|
|
1,115,020
|
|
|
1,157,112
|
|
Construction in progress
|
|
33,245
|
|
|
39,133
|
|
Property, plant and equipment, net
|
|
$
|
1,148,265
|
|
|
$
|
1,196,245
|
|
Depreciation expense on property, plant and equipment of
$88,197
,
$91,154
and
$77,444
is included in cost of sales in the consolidated statements of operations for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
6.
Goodwill
The Partnership's goodwill balance was
$5,814
at
December 31, 2018
and
2017
. The impairment assessment for the recorded goodwill was performed in October
2018
and did not indicate impairment of the goodwill. The fair value of the goodwill was calculated using both a discounted cash flow methodology and a market value methodology. The discounted cash flow projections were based on a
ten
-year forecast, from 2019 to 2028, to reflect the cyclicality of the Partnership's business. The forecast was based on prices and spreads projected by IHS Markit, a chemical industry organization offering market and business advisory services for the chemical market, for the same period, and estimates by management, including their strategic and operational plans. Other significant assumptions used in the discounted cash flow projection included sales volumes based on production capacities. The future cash flows were discounted to present value using a discount rate of
8.5%
. The significant assumptions used in determining the fair value of the reporting unit using the market value methodology include the determination of appropriate market comparables and the estimated multiples of EBITDA a willing buyer is likely to pay.
7.
Deferred Charges and Other Assets
Deferred charges and other assets, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
Turnaround costs, net
|
|
$
|
56,533
|
|
|
$
|
76,593
|
|
Interest rate contract
|
|
—
|
|
|
302
|
|
Other
|
|
4,371
|
|
|
4,933
|
|
Total deferred charges and other assets
|
|
$
|
60,904
|
|
|
$
|
81,828
|
|
Amortization expense on other assets of
$20,645
,
$22,831
and
$20,766
is included in the consolidated statements of operations for the years ended
December 31, 2018
,
2017
and
2016
, respectively. Certain other assets are amortized over periods ranging from
five
to
fifteen
years using the straight-line method.
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
8.
Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
OpCo Revolver (variable interest rate of London Interbank Offered Rate ("LIBOR") plus
2.0%, scheduled maturity of September 25, 2023)
|
|
$
|
224,064
|
|
|
$
|
220,416
|
|
MLP Revolver (variable interest rate of LIBOR plus 2.0%, scheduled maturity of
April 29, 2021)
|
|
253,544
|
|
|
253,544
|
|
Long-term debt payable to Westlake
|
|
$
|
477,608
|
|
|
$
|
473,960
|
|
On August 4, 2014, OpCo entered into a
$600,000
senior unsecured revolving credit facility agreement with Westlake (the "OpCo Revolver"). On September 25, 2018, the OpCo Revolver was amended to extend the maturity date from August 4, 2019 to September 25, 2023 and to revise the applicable margin from
3%
to
2%
.The OpCo Revolver accrues interest quarterly at a rate of LIBOR plus
2.0%
, which may be paid-in-kind as an addition to the principal at OpCo's option.
On April 29, 2015, the Partnership entered into a
$300,000
revolving credit facility agreement with Westlake (the "MLP Revolver") to fund the Partnership's purchase of an additional
2.7%
newly-issued, limited partner interest in OpCo for
$135,341
. On August 1, 2017, the Partnership entered into an amendment to the MLP Revolver agreement, extending the maturity date from April 29, 2018 to April 29, 2021. On December 5, 2017, the Partnership entered into an amendment to the MLP Revolver credit agreement, increasing borrowing capacity from
$300,000
to
$600,000
. Borrowings under the MLP Revolver bear interest at LIBOR plus a spread ranging from
2.0%
to
3.0%
(depending on the Partnership's consolidated leverage ratio), payable quarterly. The MLP Revolver provides that the Partnership may pay all or a portion of the interest on any borrowings in kind, in which case any such amounts would be added to the principal amount of the loan. The MLP Revolver requires that the Partnership maintain a consolidated leverage ratio of either (1) during any one-year period following certain types of acquisitions (including acquisitions of additional interests in OpCo),
5.50
:1.00 or less, or (2) during any other period,
4.50
:1.00 or less. The MLP Revolver also contains certain other customary covenants. The repayment of borrowings under the MLP Revolver is subject to acceleration upon the occurrence of an event of default. In August 2015, the Partnership entered into an interest rate contract with Westlake to fix the LIBOR component of the interest rate for a portion of the MLP Revolver balance. The interest rate contract terminated in August 2018.
As of
December 31, 2018
, the Partnership was in compliance with all of the covenants under the OpCo Revolver and the MLP Revolver.
The weighted average interest rate on all long-term debt was
4.40%
and
3.76%
at
December 31, 2018
and
2017
, respectively.
As of
December 31, 2018
, the Partnership had no scheduled maturities of long-term debt until 2021. The OpCo Revolver is scheduled to mature on September 25, 2023 and the MLP Revolver is scheduled to mature on April 29, 2021.
9.
Distributions and Net Income Per Limited Partner Unit
On
January 25, 2019
, the board of directors of Westlake Chemical Partners GP LLC ("Westlake GP"), the Partnership's general partner, declared a quarterly cash distribution for the period from October 1,
2018
to
December 31, 2018
of
$0.4328
per common unit. This distribution was paid on
February 20, 2019
to unitholders of record on
February 5, 2019
.
On July 27, 2018, the Partnership's agreement of limited partnership (the "Partnership Agreement") was amended to revise the minimum quarterly distribution thresholds for the Partnership's incentive distribution rights. The amended Partnership Agreement provides that the Partnership will distribute cash each quarter to all the unitholders, pro-rata, until each common unit has received a distribution of
$1.2938
. If cash distributions to the Partnership's unitholders exceed
$1.2938
per common unit in any quarter, the Partnership's unitholders and Westlake, as the holder of the Partnership's incentive distribution rights, will receive distributions according to the following percentage allocations:
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
|
|
|
|
|
|
|
|
|
|
Marginal Percentage Interest in Distributions
|
Total Quarterly Distribution Per Unit
|
|
Unitholders
|
|
IDR Holders
|
Above $1.2938 up to $1.4063
|
|
85.0
|
%
|
|
15.0
|
%
|
Above $1.4063 up to $1.6875
|
|
75.0
|
%
|
|
25.0
|
%
|
Above $1.6875
|
|
50.0
|
%
|
|
50.0
|
%
|
The Partnership's distribution for the three months ended
December 31, 2018
did not exceed the
$1.2938
per unit threshold, and, as a result, no distribution was made with respect to the Partnership's incentive distribution rights to Westlake, as the holder of the Partnership's incentive distribution rights.
Prior to the amendment, the Partnership Agreement provided that the Partnership's unitholders and Westlake, as the holder of the Partnership's incentive distribution rights, would receive distributions according to the following percentage allocations:
|
|
|
|
|
|
|
|
|
|
Marginal Percentage Interest in Distributions
|
Total Quarterly Distribution Per Unit
|
|
Unitholders
|
|
IDR Holders
|
Above $0.3163 up to $0.3438
|
|
85.0
|
%
|
|
15.0
|
%
|
Above $0.3438 up to $0.4125
|
|
75.0
|
%
|
|
25.0
|
%
|
Above $0.4125
|
|
50.0
|
%
|
|
50.0
|
%
|
The distributions are declared subsequent to quarter end; therefore, the table below represents total cash distributions declared from earnings of the related periods pertaining to such distributions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2018
|
|
2017
|
|
2016
|
Net income attributable to the Partnership
|
|
$
|
49,347
|
|
|
$
|
48,670
|
|
|
$
|
40,940
|
|
Less:
|
|
|
|
|
|
|
Limited partners' distribution declared on common units
|
|
53,516
|
|
|
34,909
|
|
|
19,016
|
|
Limited partners' distribution declared on subordinated units
|
|
—
|
|
|
9,133
|
|
|
16,784
|
|
Distributions declared with respect to the incentive distribution rights
|
|
733
|
|
|
1,666
|
|
|
281
|
|
(Distribution in excess of net income) net income in excess of
distribution
|
|
$
|
(4,902
|
)
|
|
$
|
2,962
|
|
|
$
|
4,859
|
|
Net income per unit applicable to common limited partner units and to subordinated limited partner units is computed by dividing the respective limited partners' interest in net income by the weighted-average number of common units and subordinated units outstanding for the period. Because the Partnership has more than one class of participating securities, it uses the two-class method when calculating the net income per unit applicable to limited partners. The classes of participating securities include common units, subordinated units and incentive distribution rights. Net income attributable to the Partnership is allocated to the unitholders in accordance with their respective ownership percentages in preparation of the consolidated statements of changes in equity. However, when distributions related to the incentive distribution rights are made, net income equal to the amount of those distributions is first allocated to the general partner before the remaining net income is allocated to the unitholders based on their respective ownership percentages. Basic and diluted net income per unit is the same because the Partnership does not have any potentially dilutive units outstanding for the periods presented.
As discussed further in Note
10
, the
12,686,115
subordinated units, all of which were owned by Westlake, were converted into common units effective August 30, 2017. For purposes of calculating net income per unit, the subordinated units were treated as if they had been converted to common units on July 1, 2017. Therefore, the subordinated units did not share in the distribution of cash generated from July 1, 2017 to December 31, 2017, and the Partnership did not allocate any earnings to the subordinated unitholders from July 1, 2017 to December 31, 2017 for the determination of net income per unit.
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Limited Partners' Common Units
|
|
Incentive Distribution Rights
|
|
Total
|
Net income attributable to the Partnership:
|
|
|
|
|
|
|
Distribution
|
|
$
|
53,516
|
|
|
$
|
733
|
|
|
$
|
54,249
|
|
Distribution in excess of net income
|
|
(4,902
|
)
|
|
—
|
|
|
(4,902
|
)
|
Net income
|
|
$
|
48,614
|
|
|
$
|
733
|
|
|
$
|
49,347
|
|
Weighted average units outstanding:
|
|
|
|
|
|
|
Basic and diluted
|
|
32,240,858
|
|
|
|
|
32,240,858
|
|
Net income per limited partner unit:
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Limited Partners' Common Units
|
|
Limited Partners' Subordinated Units
|
|
Incentive Distribution Rights
|
|
Total
|
Net income attributable to the Partnership:
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
34,909
|
|
|
$
|
9,133
|
|
|
$
|
1,666
|
|
|
$
|
45,708
|
|
(Distribution in excess of net income) net income
in excess of distribution
|
|
3,101
|
|
|
(139
|
)
|
|
—
|
|
|
2,962
|
|
Net income
|
|
$
|
38,010
|
|
|
$
|
8,994
|
|
|
$
|
1,666
|
|
|
$
|
48,670
|
|
Weighted average units outstanding:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
22,101,547
|
|
|
6,290,923
|
|
|
|
|
28,392,470
|
|
Net income per limited partner unit:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
1.72
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Limited Partners' Common Units
|
|
Limited Partners' Subordinated Units
|
|
Incentive Distribution Rights
|
|
Total
|
Net income attributable to the Partnership:
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
19,016
|
|
|
$
|
16,784
|
|
|
$
|
281
|
|
|
$
|
36,081
|
|
Net income in excess of distribution
|
|
2,581
|
|
|
2,278
|
|
|
—
|
|
|
4,859
|
|
Net income
|
|
$
|
21,597
|
|
|
$
|
19,062
|
|
|
$
|
281
|
|
|
$
|
40,940
|
|
Weighted average units outstanding:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
14,373,615
|
|
|
12,686,115
|
|
|
|
|
27,059,730
|
|
Net income per limited partner unit:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
|
|
|
|
Distribution Per Common Unit
Distributions per common unit for the years ended December 31, 2018,
2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Distributions per common unit
|
|
$
|
1.6134
|
|
|
$
|
1.4405
|
|
|
$
|
1.2900
|
|
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
10.
Partners' Equity
Following the Partnership’s cash distribution for the second quarter of 2017, the requirement under the Partnership Agreement for the conversion of all subordinated units was satisfied. As a result, effective August 30, 2017, the
12,686,115
subordinated units owned by Westlake were converted into common units on a one-for-one basis and thereafter participate on terms equal with all other common units in distributions of available cash.
On September 29, 2017, the Partnership completed its secondary offering of
5,175,000
common units at a price of
$22.00
per unit. Net proceeds to the Partnership from the sale of the units were
$110,739
, net of underwriting discounts, structuring fees and estimated offering expenses of approximately
$3,111
.
On October 4, 2018, the Partnership and Westlake Chemical Partners GP LLC, the general partner of the Partnership, entered into an Equity Distribution Agreement with UBS Securities LLC, Barclays Capital Inc., Citigroup Global Markets Inc., Deutsche Bank Securities Inc., RBC Capital Markets, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC to offer and sell the Partnership's common units, from time to time, up to an aggregate offering amount of
$50,000
. No common units were issued under this program in 2018.
11.
Related Party Transactions
The Partnership and OpCo regularly enter into related party transactions with Westlake. See below for a description of transactions with related parties.
Sales to Related Parties
OpCo sells ethylene to Westlake under the Ethylene Sales Agreement. Additionally, the Partnership and OpCo from time to time provide other services or products for which it charges Westlake a fee.
Sales to related parties were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Net sales—Westlake
|
|
$
|
1,074,957
|
|
|
$
|
973,081
|
|
|
$
|
853,719
|
|
Under the Services and Secondment Agreement, OpCo uses a portion of its production capacity to process purge gas for Westlake. On August 4, 2016, OpCo and Westlake entered into an amendment to the Ethylene Sales Agreement in order to provide that certain of the pricing components that make up the price for ethylene sold thereunder would be modified to reflect the portion of OpCo's production capacity that is used to process Westlake's purge gas instead of producing ethylene and to clarify that costs specific to the processing of Westlake's purge gas would be recovered under the Services and Secondment Agreement, and not the Ethylene Sales Agreement.
Cost of Sales from Related Parties
Charges for goods and services purchased by the Partnership and OpCo from Westlake and included in cost of sales relate primarily to feedstock purchased under the Feedstock Supply Agreement and services provided under the Services and Secondment Agreement.
Charges from related parties in cost of sales were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Feedstock purchased from Westlake and included in cost of sales
|
|
$
|
556,362
|
|
|
$
|
425,255
|
|
|
$
|
287,778
|
|
Other charges from Westlake and included in cost of sales
|
|
114,364
|
|
|
96,813
|
|
|
85,872
|
|
Total
|
|
$
|
670,726
|
|
|
$
|
522,068
|
|
|
$
|
373,650
|
|
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
Services from Related Parties Included in Selling, General and Administrative Expenses
Charges for services purchased by the Partnership from Westlake and included in selling, general and administrative expenses primarily relate to services Westlake performs on behalf of the Partnership under the Omnibus Agreement, including the Partnership's finance, legal, information technology, human resources, communication, ethics and compliance and other administrative functions.
Charges from related parties included within selling, general and administrative expenses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Services received from Westlake and included in selling, general and
administrative expenses
|
|
$
|
24,618
|
|
|
$
|
27,262
|
|
|
$
|
21,971
|
|
Goods and Services from Related Parties Capitalized as Assets
Charges for goods and services purchased by the Partnership and OpCo from Westlake which were capitalized as assets relate primarily to the services of Westlake employees under the Services and Secondment Agreement.
Charges from related parties for goods and services capitalized as assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Goods and services purchased from Westlake and capitalized as assets
|
|
$
|
2,519
|
|
|
$
|
3,491
|
|
|
$
|
17,874
|
|
Receivable under the Investment Management Agreement
On August 1, 2017, the Partnership, OpCo and Westlake executed an investment management agreement (the "Investment Management Agreement") that authorized Westlake to invest the Partnership and OpCo’s excess cash with Westlake for a term of up to a maximum of nine months. Per the terms of the Investment Management Agreement, the Partnership earns a market return plus five basis points and Westlake provides daily availability of the invested cash to meet any liquidity needs of the Partnership or OpCo. Accrued interest of
$496
and
$340
was included in the receivable under the Investment Management Agreement balance at
December 31, 2018
and
2017
, respectively. The interest earned related to the Investment Management Agreement was
$2,646
and
$340
for the years ended
December 31, 2018
and
2017
, respectively.
The Partnership's receivable under the Investment Management Agreement was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
Receivable under the Investment Management Agreement
|
|
$
|
148,956
|
|
|
$
|
136,510
|
|
Accounts Receivables
The Partnership's accounts receivable from Westlake result primarily from ethylene sales to Westlake, any shortfall recoverable from Westlake and any buyer deficiency fees, in each case under the Ethylene Sales Agreement. Under the Ethylene Sales Agreement, if production costs billed to Westlake on an annual basis are less than
95%
of the actual production costs incurred by OpCo during the year, OpCo is entitled to recover the shortfall in the subsequent year. The shortfall is recognized in the period when such production activities occur.
The Partnership's accounts payable to Westlake result primarily from feedstock purchases under the Feedstock Supply Agreement and services provided under the Services and Secondment Agreement and the Omnibus Agreement. The Partnership's accounts receivable from Westlake were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
Accounts receivable—Westlake
|
|
$
|
57,280
|
|
|
$
|
43,884
|
|
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
Accounts Payable
The Partnership's accounts payable to Westlake were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
Accounts payable—Westlake
|
|
$
|
27,477
|
|
|
$
|
14,027
|
|
Debt Payable to Related Parties
See Note
8
for a description of related party debt payable balances. Interest on related party debt payable balances, net of capitalized interest, for the years ended December 31,
2018
,
2017
and
2016
was
$21,433
,
$21,861
and
$12,607
, respectively, and is reflected as a component of other income (expense) in the consolidated and statements of operations. Interest capitalized as a component of property, plant and equipment on related party debt was
$175
and
$435
for the years ended
December 31, 2018
and
2017
, respectively. At
December 31, 2018
and
2017
, accrued interest on related party debt was
$5,448
and
$4,590
, respectively, and is reflected as a component of accrued liabilities in the consolidated balance sheets.
Debt payable to related parties was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
Long-term debt payable to Westlake
|
|
$
|
477,608
|
|
|
$
|
473,960
|
|
Major Customer and Concentration of Credit Risk
During the years ended
December 31, 2018
,
2017
and
2016
, Westlake accounted for approximately
83.6%
,
83.0%
and
86.5%
, respectively, of the Partnership's net sales.
General
In August 2015, the Partnership entered into an interest rate contract with Westlake to fix the LIBOR component of the interest rate for a portion of the MLP Revolver balance. The interest rate contract expired in August 2018.
During the years ended
December 31, 2018
,
2017
and
2016
, the Partnership reimbursed
$418
,
$415
and
$245
, respectively, to Westlake for certain state tax payments.
OpCo has entered into
two
site lease agreements with Westlake, and each has a term of
50
years. Pursuant to the site lease agreements, OpCo pays Westlake
one
dollar per site per year.
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
12.
Unit-based Compensation
The Westlake Chemical Partners LP Long-Term Incentive Plan (the "Plan") was adopted on July 15, 2014 and provides for grants of unit options, restricted units, phantom units, unit awards, distribution equivalent rights ("DERs") and other unit-based awards. The purpose of the Plan is to attract and retain the services of individuals who are essential for the growth and profitability of the Partnership and to encourage such individuals to devote their best efforts to advancing the business of the Partnership and its affiliates. Awards under the Plan are determined by the board of directors of the Partnership's general partner or a committee thereof (the "Committee"). Under the Plan, DERs may be granted, which represent a contingent right to receive an amount in cash, units, restricted units and/or phantom units, as determined by the Committee at its sole discretion, equal in value to the cash distributions made by the Partnership with respect to a common unit during the period such award is outstanding. The terms and conditions of each award are determined by the Committee. The maximum number of common units of the Partnership that may be delivered with respect to awards under the Plan is
1,270,000
. The phantom units along with a corresponding number of DERs were granted to certain non-employee directors of the general partner of the Partnership during the years ended
December 31, 2018
,
2017
and
2016
. These phantom units vest on either the first or third anniversary of the grant date. There were no forfeitures under the Plan during
2018
,
2017
and
2016
. During 2016, the vesting of
5,543
phantom units was accelerated in connection with the retirement of
one
of our non-employee directors. The total fair value of phantom units that vested during the year ended December 31,
2018
was $
488
.
Non-vested phantom unit awards as of December 31,
2018
and
2017
and awards granted during the respective periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
Weighted
Average Fair Value
|
Non-vested balance at December 31, 2016
|
|
21,320
|
|
|
$
|
22.77
|
|
Granted
|
|
10,146
|
|
|
23.75
|
|
Vested
|
|
(2,202
|
)
|
|
23.42
|
|
Non-vested balance at December 31, 2017
|
|
29,264
|
|
|
23.09
|
|
Granted
|
|
9,777
|
|
|
26.00
|
|
Vested
|
|
(19,364
|
)
|
|
25.20
|
|
Non-vested balance at December 31, 2018
|
|
19,677
|
|
|
23.78
|
|
Each phantom unit represents the right to receive, upon vesting, either a cash payment equal to the fair market value of one Partnership common unit or a Partnership common unit. Each DER has distribution rights only so long as the phantom units to which it relates to has not vested or been settled.
The awards, which are classified as liability awards for financial accounting purposes, are re-measured at each reporting date until they vest. The total units available for grant at
December 31, 2018
were
1,250,323
. The total compensation cost recognized during the years ended
December 31, 2018
,
2017
and
2016
was
$363
,
$289
and
$194
, respectively, and is included in selling, general and administrative expenses and classified as a liability in the consolidated financial statements of the Partnership. The unrecognized compensation cost associated with all grants under the Plan at
December 31, 2018
was
$200
and the weighted average remaining term of the units at
December 31, 2018
was
0.66
years.
13.
Fair Value Measurements
The Partnership reports certain assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Under the accounting guidance for fair value measurements, inputs used to measure fair value are classified in one of three levels:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
The Partnership has financial assets and liabilities subject to fair value measures. These financial assets and liabilities include cash and cash equivalents, accounts receivable, net, accounts payable and long-term debt payable to Westlake, all of which are recorded at carrying value. The amounts reported in the consolidated balance sheets for accounts receivable, net and accounts payable approximate their fair value due to the short maturities of these instruments. The carrying and fair values of the Partnership's long-term debt at
December 31, 2018
and
December 31, 2017
are summarized in the table below. The fair value of debt is determined based on the present value of expected future cash flows using a discounted cash flow methodology. Because the Partnership's valuation methodology used for long-term debt requires the use of significant unobservable inputs, the inputs used to measure the fair value of the Partnership's long-term debt are classified as Level 3 within the fair value hierarchy. Inputs used to estimate the fair values of the Partnership's long-term debt include the selection of an appropriate discount rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
OpCo Revolver
|
|
$
|
224,064
|
|
|
$
|
221,002
|
|
|
$
|
220,416
|
|
|
$
|
228,180
|
|
MLP Revolver
|
|
253,544
|
|
|
249,747
|
|
|
253,544
|
|
|
258,234
|
|
14.
Income Taxes
The Partnership is a limited partnership and is treated as a partnership for U.S. federal income tax purposes and, therefore, is not liable for entity-level federal income taxes. The Partnership is, however, subject to state and local income taxes.
The components of income tax of the Partnership are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State and local
|
|
578
|
|
|
796
|
|
|
691
|
|
|
|
578
|
|
|
796
|
|
|
691
|
|
Deferred
|
|
|
|
|
|
|
Federal
|
|
—
|
|
|
—
|
|
|
—
|
|
State and local
|
|
(556
|
)
|
|
484
|
|
|
344
|
|
|
|
(556
|
)
|
|
484
|
|
|
344
|
|
Total provision
|
|
$
|
22
|
|
|
$
|
1,280
|
|
|
$
|
1,035
|
|
The reconciliation of income tax expense at the U.S. statutory rate to the income tax expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Provision for federal income tax, at statutory rate
|
|
$
|
69,425
|
|
|
$
|
124,018
|
|
|
$
|
124,054
|
|
State income tax provision, net of federal income tax effect
|
|
22
|
|
|
1,280
|
|
|
1,035
|
|
Partnership income not subject to entity-level federal income tax
|
|
(69,425
|
)
|
|
(124,018
|
)
|
|
(124,054
|
)
|
Total provision
|
|
$
|
22
|
|
|
$
|
1,280
|
|
|
$
|
1,035
|
|
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
The tax effects of the principal temporary differences between financial reporting and income tax reporting are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
Property, plant and equipment
|
|
$
|
(1,555
|
)
|
|
$
|
(2,004
|
)
|
Turnaround costs
|
|
(109
|
)
|
|
(216
|
)
|
Total deferred tax liabilities
|
|
$
|
(1,664
|
)
|
|
$
|
(2,220
|
)
|
|
|
|
|
|
Balance sheet classifications
|
|
|
|
|
Noncurrent deferred tax liability
|
|
$
|
(1,664
|
)
|
|
$
|
(2,220
|
)
|
Total deferred tax liabilities
|
|
$
|
(1,664
|
)
|
|
$
|
(2,220
|
)
|
15.
Supplemental Information
Accrued Liabilities
Accrued liabilities were
$16,250
and
$15,697
at
December 31, 2018
and
2017
, respectively. Accruals related to accrued interest, capital expenditures, and maintenance expenses, which are components of accrued liabilities were
$5,448
,
$2,818
and
$2,688
at
December 31, 2018
, respectively, and were
$4,590
,
$3,197
and
$3,698
at
December 31, 2017
, respectively. No other component of accrued liabilities was more than five percent of total current liabilities.
Cash Flow Information
Non-cash Investing Activity
The change in capital expenditure accrual
reducing
additions to property, plant and equipment was
$1,823
for the year ended
December 31, 2018
. The change in capital expenditure accrual
increasing
additions to property, plant and equipment was
$867
and
$18,113
, for the years ended
December 31, 2017
and
2016
, respectively.
Interest and Income Taxes
Interest paid by the Partnership, net of interest capitalized, was
$20,551
,
$23,063
and
$9,901
for the years ended
December 31, 2018
,
2017
and
2016
, respectively. Income tax paid by the Partnership was
$711
,
$716
and
$633
for the years ended
December 31, 2018
,
2017
and
2016
, respectively, of which
$293
,
$301
and
$388
was paid directly to the tax authorities for the years ended
December 31, 2018
,
2017
and
2016
, and
$418
,
$415
and
$245
was paid to Westlake as reimbursements for the years ended
December 31, 2018
,
2017
and
2016
.
16.
Commitments and Contingencies
The Partnership is subject to environmental laws and regulations that can impose civil and criminal sanctions and that may require the Partnership to mitigate the effects of contamination caused by the release or disposal of hazardous substances into the environment. These laws include the federal Clean Air Act, the federal Water Pollution Control Act, the Resource Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), the Toxic Substances Control Act and various other federal, state and local laws and regulations. Under CERCLA, an owner or operator of property may be held strictly liable for remediating contamination without regard to whether that person caused the contamination, and without regard to whether the practices that resulted in the contamination were legal at the time they occurred. Because the Partnership's production sites have a history of industrial use, it is impossible to predict precisely what effect these legal requirements will have on the Partnership. Westlake will indemnify the Partnership for liabilities that occurred or existed prior to August 4, 2014.
The Partnership is involved in various legal proceedings incidental to the conduct of its business. The Partnership does not believe that any of these legal proceedings will have a material adverse effect on its financial condition, results of operations or cash flows.
WESTLAKE CHEMICAL PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars, except unit amounts and per unit data)
Other Commitments
The Partnership is obligated under various long-term and short-term noncancelable operating leases, primarily related to rail car leases and land. Several of the leases provide for renewal terms. At
December 31, 2018
, future minimum lease commitments were as follows:
|
|
|
|
|
2019
|
$
|
751
|
|
2020
|
684
|
|
2021
|
563
|
|
2022
|
264
|
|
2023
|
—
|
|
Thereafter
|
—
|
|
|
$
|
2,262
|
|
Rental expense was approximately
$2,261
,
$2,410
and
$2,542
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
The Partnership has various purchase commitments for its capital projects and for materials, supplies and services incident to the ordinary conduct of business.
17.
Quarterly Financial Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
2018
|
|
June 30,
2018
|
|
September 30,
2018
|
|
December 31,
2018
|
Net sales
|
|
$
|
284,272
|
|
|
$
|
301,975
|
|
|
$
|
363,650
|
|
|
$
|
335,725
|
|
Gross profit
|
|
92,505
|
|
|
97,118
|
|
|
93,907
|
|
|
93,629
|
|
Income from operations
|
|
85,372
|
|
|
89,743
|
|
|
87,998
|
|
|
86,456
|
|
Net income
|
|
80,714
|
|
|
84,476
|
|
|
83,799
|
|
|
81,582
|
|
Net income attributable to Westlake Chemical Partners LP
|
|
12,295
|
|
|
12,757
|
|
|
12,412
|
|
|
11,883
|
|
Net income attributable to Westlake Chemical Partners LP
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per common unitholder
|
|
$
|
0.36
|
|
|
$
|
0.40
|
|
|
$
|
0.38
|
|
|
$
|
0.37
|
|
Common units outstanding
|
|
32,237,266
|
|
|
32,237,266
|
|
|
32,242,210
|
|
|
32,247,371
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
2017
|
|
June 30,
2017
|
|
September 30,
2017
|
|
December 31,
2017
|
Net sales
|
|
$
|
277,448
|
|
|
$
|
290,113
|
|
|
$
|
296,775
|
|
|
$
|
308,645
|
|
Gross profit
|
|
97,961
|
|
|
99,571
|
|
|
95,403
|
|
|
110,732
|
|
Income from operations
|
|
90,133
|
|
|
92,685
|
|
|
88,598
|
|
|
102,991
|
|
Net income
|
|
86,028
|
|
|
86,470
|
|
|
82,245
|
|
|
98,315
|
|
Net income attributable to Westlake Chemical Partners LP
|
|
9,764
|
|
|
9,975
|
|
|
13,385
|
|
|
15,546
|
|
Net income attributable to Westlake Chemical Partners LP
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per common unitholder
|
|
$
|
0.35
|
|
|
$
|
0.36
|
|
|
$
|
0.47
|
|
|
$
|
0.46
|
|
Basic and diluted earnings per subordinated unitholder
|
|
$
|
0.35
|
|
|
$
|
0.36
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Common units outstanding
|
|
14,373,615
|
|
|
14,373,615
|
|
|
32,234,730
|
|
|
32,234,730
|
|
Subordinated units outstanding
|
|
12,686,115
|
|
|
12,686,115
|
|
|
—
|
|
|
—
|
|